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Crude's Long Road Back

07/14/2020 1:03 am EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Phil Flynn breaks down the current fundamentals of the energy sector.

As global oil demand starts to recover, OPEC plus has a problem. How do they increase production to maintain market share and at the same time, not crash the market in a sea of oversupply? The Wall Street Journal suggests that OPEC + is getting ready to raise output by 2.0 million barrel of oil a day in August. Bloomberg News says that they want to do this in a way that does not create a taper tantrum. Talk of an increase in production is seeing oil dip on this talk.

Bloomberg writes that, “Saudi Oil Minister Prince Abdulaziz bin Salman likes the idea of OPEC+ acting as the central bank of oil. And he expresses admiration for Alan Greenspan, former chairman of the U.S. Federal Reserve. The challenge now confronting the oil producers’ club is one that’s all too familiar to the Fed: How to avoid a “taper tantrum,” the market panic that ensued when the institution proposed tightening monetary policy in 2013. OPEC, fancies itself as the central bank of crude oil. The reality is they have proven to be a less than credible steward as proven with Saudi Arabia starting a price war in the throes of the global Coronavirus pandemic. Regardless, the worries of the taper tantrum is a real concern for a cartel that wants to have its cake and eat it too. In a market that has seen oil demand recover faster than almost every major reporting agency and analyst has predicted, could still be at risk with the rising cases of Covid-19.

Yet in the big picture from an economic perspective, Covid-19 is no match for the amount of global economic stimulus that is over $9 trillion. China is promising more stimulus. China’s Premier Li said that China will ramp up credit supply and lower financing costs. This has led oil away from the depths of total demand devastation to a trajectory that is getting oil demand almost back to normal despite the fact that the global economy is not back to normal. So, talk of a production rise is a threat to the market at least psychologically.

The sell-off in oil on the return of Libyan oil was perhaps a bit too optimistic. Reuters reports that, “Libya’s National Oil Corp (NOC) on Sunday accused the United Arab Emirates of instructing eastern forces in Libya’s civil war to reimpose a blockade of oil exports after the departure of a first tanker in six months. The UAE, along with Russia and Egypt, supports the eastern-based Libyan National Army (LNA) of Khalifa Haftar, which on Saturday said the blockade would continue despite it having let a tanker load with oil from storage. “NOC has been informed that the instructions to shut down production were given to (the LNA) by the United Arab Emirates,” it said in a statement, resuming force majeure on all oil exports. There was no immediate comment on NOC’s accusation from either the LNA or the UAE.

U.S. Rig Counts

The rig count is continuing to fall but that can’t take away the fact that the U.S. produced a record amount of natural gas in 2019. Baker Hughes, BKR, on Friday reported that the number of active U.S. rigs drilling for oil edged down by four to 181 this week. That followed a decline of three oil rigs a week earlier. The number of oil rigs has not seen an increase since the week ended March 13. The total active U.S. rig count, meanwhile, fell by five to 258, according to Baker Hughes and Market Watch. The Energy Information Administration reports, “Natural gas is one of the main sources of energy in the United States. In 2019, U.S. production of dry natural gas increased to almost 34 trillion cubic feet (Tcf) and consumption increased to 31 Tcf—both values were records. The U.S. Energy Information Administration’s (EIA) U.S. natural gas flow diagram shows the magnitude of U.S. natural gas supply (production, imports, and withdrawals from storage) and disposition (consumption, exports, and additions to storage) in 2019.

U.S. natural gas production has increased in the past decade because the widespread adoption of horizontal drilling and hydraulic fracturing techniques has allowed operators to produce natural gas more-economically from shale formations. In each year since 2017, on an annual basis, production of dry natural gas has exceeded consumption within the United States.

In 2019, gross U.S. withdrawals of natural gas and other compounds extracted at the wellhead totaled nearly 41 Tcf, and most came from shale natural gas wells. Marketed natural gas production, which excludes natural gas used for repressuring wells, vented and flared gas, and non-hydrocarbon gases, totaled more than 36 Tcf. U.S. marketed natural gas was further processed into about 34 Tcf of dry natural gas and about 3 Tcf of natural gas plant liquids, such as ethane and propane.

As natural gas production has increased in the United States, exports of natural gas have also increased, surpassing natural gas imports in 2017 for the first time since 1957. In 2019, the U.S. exported a record of nearly 5 Tcf of natural gas, mostly by pipeline to Mexico and Canada or shipped overseas as liquefied natural gas (LNG). Natural gas imports in 2019 were less than 3 Tcf, the lowest level since 2015. Most U.S. natural gas imports originate in Canada.

In the United States, significant amounts of natural gas are also added to or withdrawn from underground storage throughout the year. Natural gas is added, or injected, to storage during periods of low consumption, typically during the spring and fall, and is withdrawn from storage during periods of high consumption, typically in the winter and summer. While gasoline demand is coming back, prices in many parts of the country are at around the lowest level for July since 2004. Still Rbob futures (unleaded gasoline) are bottoming and we should be buying breaks.

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. Not a Subscriber but want to be? Here! I will be a speaker at the Money Show in Las Vegas! I look forward to seeing you there.

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