The Phil Flynn Energy Report
Do we have a Deal?
Global oil markets are in flux as we all wait to see if OPEC and their favorite co-conspirator Russia can agree to a production deal and avoid another all-out price war. While nothing is official yet, it’s possible that we could be getting a deal, just not the deal that traders might have expected.
For weeks the markets have expected a rollover of the April production cuts of 9.7 million barrels per day (bpd) for 3 months so the market could adjust for an anticipated wave of Covid-19 lockdowns this winter. Yet, players like the UAE and Russia felt that the global demand picture was improving enough to where the group should start raising output. That created a rift with Saudi Arabia, the OPEC+ de facto leader, and threatened to start another production war that might have crashed prices. Yet it appears that cooler heads have prevailed, and if the Wall Street Journal has it right, we could start to see OPEC+ raise output by a modest 500,000 bpd starting next month.
Oil markets showed a bit of disappointment with this expected OPEC+ plan to raise output by a modest 500,000 bpd next month and are still in the dark about whether or not this deal will fall apart. We know that the deal adds oil to the market where the market had priced in an extension of the existing cut for 3 months. Still, if that deal is agreed to, the market may forgive them since it’s a relatively small increase compared to the 9.7 million barrel reduction. Plus, as Covid-19 vaccines are being approved, the market is getting a boost regardless. Oil demand expectations are on the rise, and despite new lockdowns, the hopes are that a vaccine will significantly raise demand in the second half of 2021.
We still believe that oil has seen its lows for this year, barring the breakout of an all-out oil production war. Oil prices are in an uptrend, and if OPEC+ gets a deal, we could still see $50 per barrel before the end of this month.
Gasoline demand was a bit disappointed and diesel demand fell due to the Thanksgiving holiday. At Reuters, John Kemp points out that distillate rose +3.2 million barrels last week, again mostly due to the Thanksgiving holiday. The average increase in the previous 5 years for the same week was +3.1 million barrels, with a range of +2.1 million to +4.3 million. That put supply 8.5% above the 5-year seasonal average, basically unchanged from the week before: demand was +2% above the 5-year average, but production was -13% below the same average a year ago.
Now with refinery runs low, the product outlook looks bullish. Lock in hedges.
Natural gas needs stable weather forecasts. Weather models have flipped back and forth, causing gas pressure. Natural gas gets its report, and we should get a 17 billion cubic foot withdrawal.
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