The Phil Flynn Energy Report
No More Glut
Do you remember the oil glut? Sure you do: it’s the pandemic-inspired oil glut that many people said was so large that we’d never see it fully disappear. Just 1 year later, oil supplies are falling at the fastest pace they have since the pre-Covid-19 days. Now there are concerns that there won’t be enough oil around to meet growing demand.
The underinvestment in fossil fuels is starting to rear its ugly head as demand grows faster than supplies can keep up. We’re seeing production fall as there isn’t enough new drilling to offset the decline rate from existing wells.
Those concerns were magnified when the Energy Information Administration (EIA) released their weekly report that showed U.S. crude oil inventories fell by 7.6 million barrels last week. That drawdown in crude inventory was the 5th in a row and would’ve been larger if it weren't for 1.7 million barrels released from the U.S. Strategic Petroleum Reserve.
Currently, at this rate, U.S. oil inventories are falling at a pace that exceeds over 1,000,000 barrels per day (bpd). That pace is likely to continue, further cutting into the U.S. oil supplies that are already 6% below average for this time of year.
There’s also a lot of concern about the dramatic decreases that we've seen in the Cushing, OK storage hub. If you remember in the height of the Covid-19 supply glut, there were fears that the Cushing storage hub would be unable to store crude as its storage was tapped out. Now there’s a concern on the other side of the equation that supply is falling so fast that the hub could potentially fall below their minimum operating levels by the end of next month.
U.S. energy production fell last week to 11.1 million bpd, which means we’re going to be more dependent on oil imports from other countries. U.S. crude oil imports last week averaged 6.9 million bpd and that was up 197,000 barrels from the previous week. We expect that U.S. oil imports are going to have to rise to meet growing demand.
The EIA reported a big jump in U.S. gasoline demand as it hit 9.440 million bpd last week; that's up big from the week before. Gasoline demand is up 14.1% from the same period a year ago. The uptick in demand helped crude oil inventories fall by 2.9 million barrels last week and gasoline supplies overall are just 1% below the 5-year average for this time of year.
Gasoline imports in the aftermath of the Colonial Pipeline hack have been solid. Last week the U.S. imported 840,000 bpd of gasoline, but that was down from the week before where imports were over a million bpd.
Distillate fuel inventories did increase by 1.8 million barrels last week and, believe it or not, are still 4% below the 5-year average for this time of year. Demand for all distillates are on the rise, yet fuel demand hit 3.9 million bpd, which is up 18.9% from the same period a year ago. Jet fuel demand was up 97.5% compared to a year ago, which shows very clearly that air travel is rebounding.
Despite all this bullish news, the market did restrain its enthusiasm a bit as it appears that OPEC+ is laying the groundwork for a 500,000 bpd increase. While the market may see this as bearish, it actually could be bullish because 500,000 bpd still isn't going to be enough to meet demand. OPEC+ plans to meet July 1 just ahead of the U.S. 4th of July holiday.
As far as price action for the oil market goes, we expect to see a very strong rally as we head into the 4th of July holiday— that’s only 10 days away. Oftentimes when we see a rally into the 4th of July, we can hit a seasonal peak and prices will cool off a bit. So, while we expect a continued strong move upward into next week, we’re concerned that we may see a correction closer to the holiday. Before we get to that correction, we should see oil prices trade sharply higher than they are today.
Reuters is reporting that “Russian oil prices from the Volga river region for domestic market supply in July have reached a record high, rising by around 11% from the previous month thanks to stronger oil prices on global markets, Reuters monitoring showed on Thursday. Traders said oil for July delivery at the regional metering points jumped to between 36,700-37,100 [rubles] ($507.60-$513.10) per [ton], up from 32,900-33,600 [rubles] a month earlier, which was also a record high.”
At the same time, crude oil inventory in America’s largest storage hub could fall to historically low levels by the end of September as the demand rebound continues to outpace production.
Natural gas is paced to continue its strong bull trend as demand is strong both domestically and overseas. Today we got an EIA report at 9:30 a.m. CT. Look to buy brakes on natural gas going into the 4th of July holiday. We normally see a drop in demand and that could cause some natural gas prices to sell off. If we do get a 4th of July selloff, we would look at it as a great opportunity to put on some hedges, as we expect the market to tighten even further as we get into late summer.
Storage levels going into winter are going to be below the 5-year average and that, of course, means that our heating bills next winter are more than likely going to be more expensive. Who are we kidding: gasoline's going to be more expensive, diesel's going to be more expensive, your heating bills are going to be more expensive, energy is going to be more expensive. We tried to warn you.
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