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How Oil Shortages Are Born

05/28/2020 9:14 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The huge demand destruction that pushed crude oil to below zero and caused producers to pull up stakes, will create a large energy shortage when economies recover, reports Phil Flynn.

Crude oil shortages are often born in a period of oversupply. The recent crash in oil prices due to Covid-19 demand destruction has set in motion the largest energy investment pullback in history. This is being confirmed in a new report from the International Energy Agency (IEA). The IEA says the Covid-19 pandemic has set in motion the most significant drop in global energy investment in history, with spending expected to plunge in every significant sector this year – from fossil fuels to renewables and efficiency.

The IEA says that the unparalleled decline is staggering in both its scale and swiftness, with serious potential implications for energy security and clean energy transitions. The IEA reports that at the start of 2020, global energy investment was on track for growth of around 2%, which would have been the largest annual rise in spending in six years. But after the Covid-19 crisis brought large swathes of the world economy to a standstill in a matter of months, annual global investment is now expected to plummet by 20%, or almost $400 billion. 

"The historic plunge in global energy investment is deeply troubling for many reasons," said Dr. Fatih Birol, the IEA's Executive Director. "It means lost jobs and economic opportunities today, as well as lost energy supply that we might well need tomorrow once the economy recovers. The slowdown in spending on key clean energy technologies also risks undermining the much-needed transition to more resilient and sustainable energy systems." Investment in shale is anticipated to fall by 50% in 2020, and that is going to reduce U.S. oil and gas output.

Millions of barrels of future oil supply will not be there as the industry recovers from its trillion-dollar Covid-19 hit. For oil traders, they know that as demand comes back, supply will tighten, and it looks like the market will be in balance in just a few months justifying the oil markets' historic price snapback.

Stocks are also rebounding, and that should support oil. Talk of E.U. stimulus is offsetting fear about rising tensions with China. MarketWatch reported, "President Donald Trump is displeased with China over its efforts to crack down on Hong Kong, White House press secretary Kayleigh McEnany said Tuesday, adding he believes "it's hard to see how Hong Kong can remain a financial hub if China takes over."

U.S. officials have warned that China's efforts to impose new national-security laws in Hong Kong could jeopardize the city's special trade status.

EU leaders are also sending a message to China that the crackdown on Hong Kong is not within international norms and threatens the global order. How will these rising tensions impact trade and Chinese oil demand? China's rising oil demand has been one of the reasons for oil's big price comeback.

Wednesday’s American Petroleum Institute Report is thought to anticipate another crude oil draw. Oil is finding places to go, and private services are reporting that supply in Cushing, Oklahoma will fall again, easing fears of oversupply. 

China is planning to have its sovereign digital currency ready in time for the 2022 Winter Olympics. Bloomberg News reports that the People's Bank of China Governor Yi Gang released a statement on the digital currency but did not specify a firm timetable for the release.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn

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