The Phil Flynn Energy Report
The Big Guns
The big guns are out as the Federal Reserve not only cuts the target range for the federal funds rate to 0 to 1/4 percent and go back to quantitative easing (Q.E.) and plans to buy Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months. The Committee says it will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The move comes in an attempt to stave off the historic negative economic impact from the rapidly spreading coronavirus.
The Fed is pointing out the energy sector as one of the main areas that came under stress. We saw a pop in the Oilprice after that we got from the announcement by President Trump he "instructed the Secretary of Energy to purchase at a very good price large quantities of crude oil for storage in the U.S. strategic reserve. We're going to fill it right up to the top, saving the American taxpayer billions and billions of dollars, helping our oil industry [and furthering] that wonderful goal — which we've achieved, which nobody thought was possible — of energy independence." Oil railed after the comments and even opening up higher on Sunday night but failed to hold gains as global stock markets, including the U.S., took a hit. Stocks locked limit down at the 5% drop area imposed on night trading, and today's open is uncertain as around the country steps up efforts to stop the spread of the virus shutting schools, churches: restaurants and other venues. Travel bans and people working from home are continuing to take a massive hit to energy demand. As I have said before, economically, energy is ground zero for the coronavirus economic attack.
Not only will shale producers take a hit and will cut Cap X, but even Saudi Arabia is also making major action to avert a crisis. The Wall Street Journal reports that "State oil giant Saudi Aramco will cut its spending this year due to the coronavirus pandemic, while it increases its dividend, the company said Sunday, as its share price continued to decline amid the Saudi regime's price war with Russia."
The Journal says that 'the company's net profit for 2019 fell 21% to 330.69 billion riyals ($88.11 billion), down from 416.52 billion riyals ($111 billion) a year earlier. The decrease was due to lower crude prices and production cuts the Saudi government agreed to with the Organization of the Petroleum Exporting Countries, the company said. In its first financial results since its record $29 billion share sale in December, the Saudi Arabian Oil Co., as the company is formally known, said it expects capital spending for 2020 to be between $25 billion and $30 billion. That is down from $32.8 billion a year earlier, due to market conditions and recent price volatility.
The Journal says that "The decision to cut expenditures follows the company's announcement last week that the Saudi government has ordered it to boost production capacity by 1 million barrels a day to 13 million barrels a day. Saudi Arabia has said an upgrade of this kind would typically cost $30 billion."
The coming production increase presents a new challenge for Saudi Aramco's operations: Its facilities sustained a massive drone and missile attack in September. The company said it restored its capacity within 11 days, according to the Journal.
The hit to demand is already showing up at the gas pumps as prices are plummeting. According to Triple-A, the national average for gas has fallen to $2.257. Based on what we see on the futures side, it won't be too long until gasoline for a national average falls below $2.00.Its night even falls further as America works from home, and we could see prices when adjusted for inflation, perhaps test all-time lows. According to Inflation Data the "Lowest Inflation-Adjusted Price of Gasoline was $1.61 in 1998. Other Lows.
Date Inflation-Adjusted Lows
AAA says that 'pump prices continue to decline as the global economy faces significant downward pressure from COVID-19 fears and the ongoing crude price war. Since Monday, the national average for a gallon of regular gasoline has dropped by six cents to $2.32. New data from the Energy Information Administration shows that total domestic stocks decreased last week by 5 million bbl to 247 million bbl, while demand increased — from 9.19 million b/d to 9.45 million b/d. Shrinking gas stocks amid rising demand would typically put upward pressure on gasoline prices; however, cheap crude prices have helped to push gas prices lower than expected. If crude prices remain low, American motorists will likely see continued relief at the pump during the run-up to spring as the world grapples with how to contain the global public health threat and financial risks associated with COVID-19."
Bloomberg News reports that "Shares in energy producers were hammered. China's Cnooc Ltd., which gets almost all its revenue from upstream oil and gas output and is Exxon Mobil Corp.'s partner at a major project on Guyana, dropped as much as 7.2% in Hong Kong. Sydney-listed Oil Search Ltd. was down about 16%, while Japanese producer Inpex Corp. lost as much as 5.2%."
Andy Weissman of EBW analytics says that "After the April natural gas contract held support at $1.61/MMBtu early last week, NYMEX gas mounted a strong rally, rising by more than 10% from its Monday low. The move higher was triggered by a belief that oil producers' CapEx cuts will result in a sharp decline in production of associated gas. The path for natural gas this week is uncertain. While Sunday's weather forecasts are bullish, concerns regarding the strength of the U.S. economy and demand for natural gas could start to weigh increasingly on the market, potentially capping the recent rally.
Crazy volatility will keep us on edge. Do your best to control risk and big moves can be had. Be ready for the unexpected as the news flow and the volatility will keep us on edge.
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