The Phil Flynn Energy Report
The OPEC+ relationship is in peril as the world fears that disputes could lead to a new oil production war. Talk that the UAE is asserting itself instead of going along with Saudi Arabia is one of the tensions that is simmering inside the group. The UAE wants a bigger share of the global production pie and wants OPEC+ charters to compensate for previous commitments that were ignored. The drama is putting the oil bull market in jeopardy, and if it weren’t for the fact that the UK approved the first Covid-19 vaccine in the Western world, the oil market might have been hit harder. The UK has become the first country in the world to approve the Pfizer/BioNTech vaccine, paving the way for vaccinations starting as early as next week.
Bloomberg News reported on the OPEC+ drama that drove the oil market uncertainty:
“Most nations at Monday’s online session favored deferring the 1.9 million-barrel daily supply increase due to take effect in January by three months. With a new wave of virus infections hitting the global economy, they believe demand is still too fragile to absorb additional crude.
But the UAE pushed back, delegates said. Without openly opposing a delay, Energy Minister Suhail Al-Mazrouei insisted on stringent conditions — mainly the speedy implementation of cuts that other members owed in compensation for pumping too much in prior months — that rendered an agreement all but impossible.
In an apparent gesture of frustration, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman told the group that he may resign as co-chair of a key OPEC+ panel. Al Mazrouei was offered the post, but refused, according to a person familiar with the situation.”
The hope is that they can save a deal now that the Saudis and the UAE are talking. Still, memories of the failed OPEC+ meeting are going to keep the traders on edge.
The oil bull case wasn’t helped by a much-larger-than-expected 4.146 million barrel increase in crude oil supply as reported by the American Petroleum Institute (API). The increase looked more bearish because of a 3.402 million barrel increase in gasoline supply. That also came as a surprise because as you look across the country, retail gasoline prices have been rising. That retail increase would’ve suggested increasing demand over the Thanksgiving Day holiday, but the increase in gasoline supply makes the market wonder how sustainable that bump in demand will be. Look at the weekly demand number in today’s Energy Information Administration (EIA) Version. That will give us a clue. It’s possible that with a potential vaccine on the horizon, the gasoline numbers may be bottoming out and we may begin to see some growth.
Distillates were a bit boring in comparison, as the API reported a 334,000 barrel increase in supply. Still we believe that with a vaccine on the horizon, the seasonal lows for oil should be in, assuming that OPEC+ can avoid a production war and agree to extend cuts to help the market get over the hump until said vaccine is more widely available. The FDA may not only approve the Pfizer/BioNTech vaccine, but also the Moderna version in what will be a game-changer for oil demand expectations.
India is in an energy transition, not to wind or solar, but from crude oil to natural gas. India’s Petroleum and Natural Gas Minister Dharmendra Pradhan said he plans to reduce crude oil imports by 10% by 2022 and shift India to a natural gas-based economy. Perhaps learning from the U.S.’s example, a switch to more natural gas usage will positively impact the environment and, frankly, a natural gas-based economy makes a lot of sense for India. That would also be good for U.S. liquified natural gas (LNG) exports, assuming climate czar John Kerry does not shut down U.S. fracking.
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