The Phil Flynn Energy Report
Still Brexit, after all these years. One might think that after 3 years of Brexit negotiations, it would fail to move markets, yet it still does.
Last week's Brexit negotiation optimism has been replaced with a stalemate over fishing rights, rules surrounding competition, and who’s going to govern the agreement. The rift caused GBP to tank and has global markets flipped into a risk-off mode. The drama has weighed on oil at the start of the day, even as we see more evidence that the global oil market is tightening.
Javier Blas, Chief Energy Correspondent for Bloomberg, pointed out that last week, global crude oil floating inventories dropped below the 100 million barrel mark for the first time since mid-April. Floating oil had risen to 150 million from April to June and since then it’s dropped by 110 million barrels. The combination of good OPEC+ compliance, as well as a big drop in U.S. output, has helped. Demand in China and the possibility of Covid-19 vaccines should send global oil supply below average next year.
This trend is a slap in the face to the predictions that oil prices would stay low into infinity thanks to the Covid-19 pandemic. The prediction that OPEC+ cuts would have no impact on supply was wrong. The prediction that low prices wouldn’t spur demand was wrong. I’m sure we’ll be hearing from those who got it wrong, saying that Wall Street and speculators are to blame. The reality is that this is another case of low prices curing low prices as production cutbacks and demand are on an upward curve. With a vaccine on the way, the potential for a significant oil price spike next year is rising. The markets eventually find a way to work, and speculators play a significant and positive role in global oil price discovery that helps both users and consumers.
The increase in oil prices is starting to put a little life back into U.S. oil producers. According to Baker Hughes, the oil rig count increased by 5 rigs last week. That is 10 weeks out of 11 that rig count has risen, and while the U.S. oil producer has a long way to go in order to recover, there are some signs of life. Maybe that’s why OPEC+ had such a hard time extending production cuts.
Natural gas has been taking a hit on above-normal temperatures across the Midwest. Bret Walts of Bamwx.com reports that the cooler start to December in the East has panned out nicely so far, a statement further satisfied by a decent snowstorm in the Northeast this past weekend. We'll have a few more days of cooler air out there to start the week, but the gentle Pacific jet stream will become the dominant driver of weather patterns into mid-late December. There could be a cold front in the East mid-month, but the Pacific's mild air looks to win out into the latter part of December with widespread warmth for the contiguous U.S. Overall, all top drivers are indicative of warmer risks and lower demand, though some volatility in the polar vortex needs to, at the very least, be watched into the new year. To get sustained cold into next year, we'll really need a disruption of the polar vortex to overpower the strong La Niña forcing, which tends to bring mild air from the Pacific.
December 7, 1941: A day that will live in infamy. Let's pray for peace and never forget.
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