Oil Prices Are Coming Back As Number Of Covid-19 Cases In China Hits Zero

August 24, 2021 12:30 PM
Iran reconsiders taking control of a tanker in the Gulf of Oman
The oil market has priced in far too much oil demand destruction
Natural gas is strong due to a heat wave in the Midwestern U.S.
Energy Report

Energy Report

The Phil Flynn Energy Report 

Stranded

Stranded barrels and stranded people. Oil prices are coming back hard as the number of reported Covid-19 cases in China falls to zero and, due to a deadly fire in the Gulf of Mexico by a Pemex oil platform, oil production is down by about 421,000 barrels per day (bpd) from both oil lost and 125 wells that are offline. Geopolitically, the U.S. is praying for Americans who are stranded in Afghanistan and at the mercy of the Taliban as fears of a potential terror attack from ISIL and al-Qaeda rise.

But don't say stranded, because the Biden administration takes exception to that term. The New York Post reported the following:

White House Press Secretary Jen Psaki on Monday scolded a journalist who asked her about Americans “stranded” in Afghanistan — insisting it is “irresponsible” to use that term despite numerous reports of Americans being unable to board flights out.

Biden administration officials say they don’t know how many U.S. citizens remain in the country following last week’s Taliban takeover, but some are alerting news outlets that they cannot reach Kabul’s airport to be evacuated.

“I think it’s irresponsible to say Americans are stranded. They are not. We are committed to bringing Americans who want to come home home,” Psaki said at her daily press briefing.

“We are in touch with them via phone, via text, via email, via any way that we can possibly reach Americans to get them home if they want to return home.”

When pressed by Peter Doocy of Fox News on whether Americans are stranded, Psaki added, “I’m just calling you out for saying that we are stranding Americans in Afghanistan when I said — when we have been very clear that we are not leaving Americans who want to return home. We are going to bring them home and I think that’s important for the American public to hear and understand.”

On the oil demand side, things are looking up as the FDA grants the Pfizer-BioNTech Covid-19 vaccine full U.S. approval, which may encourage more companies to mandate vaccines. If China has actually controlled the spread of the Delta variant so quickly, then it’s clear that the oil market has priced in far too much oil demand destruction that will leave us short.

Bloomberg News reported the following:

Oil stored in ships has been stacking up off key Asian ports as a crackdown in China on private crude oil processors has blunted purchases and disrupted flows, including some U.S.-sanctioned barrels from Iran.

Vessels off Singapore, Malaysia and China had about 62 million barrels last week after hitting a near [3]-month high earlier this month, according to intelligence firm Kpler. Venezuelan oil and Iran’s heavier grade— commonly imported as bitumen mixture— are among the varieties held, Kpler said.

“These barrels sitting off Southeast Asia are distressed,” said Anoop Singh, Singapore-based head of East of Suez tanker research at Braemar ACM Shipbroking Pte Ltd. “They’re going to have a tough time finding homes other than China, unless the situation surrounding the U.S. sanctions changes dramatically, or China’s clampdown on its independents is eased.”

Still, that may be in the rear view mirror. China's handle on Covid-19 means those barrels won’t be stranded for long.

Natural gas is strong because of a heat wave in the Midwestern U.S., yet it’s production— or lack thereof— that’s giving this market potential for big moves this summer. The Energy Information Administration (EIA) reported:

In 2020, annual production of associated-dissolved natural gas (or associated gas)—which is natural gas produced from oil wells—declined in the combined [5] major U.S. onshore crude oil-producing regions for the first time since 2016. The share of associated gas produced in these [5] regions (Permian, Bakken, Eagle Ford, Niobrara, and Anadarko) declined by 1.5% year over year and averaged 37.7% of natural gas production in the regions. Associated gas production averaged 14.2 billion cubic feet per day (Bcf/d) in 2020 (a 4.1% decline from 2019) amid a 9.2% drop in oil production in these regions.

When natural gas dissolves in crude oil under the pressure of a rock formation, associated gas is released when the pressure on the crude oil is relieved by bringing it to the surface. Until 2020, the share of associated gas in these [5] regions, along with oil production, had been increasing. Between 2016 and 2019, associated gas production grew at its most rapid pace (6.1 Bcf/d) because of high levels of new crude oil production. Production of both crude oil and associated gas in 2020 declined with decreased demand for crude oil following responses to the [Covid-19] pandemic.

Hopefully you used market weakness to get hedged on oil and natural gas and products. It’s looking like the bottom is in, so if we get a sharp break, look to buy.

Don’t miss out on my wildly popular trade levels on all major markets, as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.