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The Morning After

07/31/2020 9:10 am EST

Focus: MARKETS

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Phil Flynn breaks down the Fed announcement and the markets’ reaction to it.

Markets are a bit hungover even as the party master, Jerome Powell, swears he will keep the party going. The Fed Chairman promised he will do whatever it takes, yet traders in search of that next high seem to want even more somehow.

Traders have been drunk on moves in stocks, gold, silver and to a lesser extent crude oil, but after weeks of celebrating, it appears the trade wants to chill out. The Fed Chairman also pointed to congress saying that the Fed needs more help, but Democrats and Republicans are far apart in a new stimulus bill. That is not helping oil even after what was a bullish crude oil draw of 10.6 million barrels, the largest of the year, as reported by the Energy Information Administration (EIA) and new reports that Iraq is still cheating on oil output.

Reuters reports that, “Iraq’s crude oil exports have increased so far in July, shipping data showed, and industry sources said, suggesting OPEC’s second-largest producer is still undershooting its production cut target under an OPEC-led deal. Exports from Basra and other southern Iraq terminals to July 29 averaged 2.75 million barrels-per-day (bpd), based on figures from Refinitiv Eikon and an industry source. That is up 50,000 bpd from June’s official figure for southern Iraq exports. “No massive change, Basra is still 2.7-2.8 million bpd,” the industry source said, referring to the change in exports seen since the first 20 days of July.

The market was counting on Iraq to not only comply with their agreed-upon production cuts, but also to make up for past cheating. Now, the market has to worry about how Saudi Arabia and Russia might respond to Iraq’s blatant dishonesty. The July figures imply Iraq is still some way from fulfilling its pledges and is exporting far more than the number July indicated. Could this put the entire OPEC plus deal at risk? I doubt it, but one must be concerned about what may come next.

Florida also has to worry about what comes next. Zero Hedge reported that, “Tropical Cyclone 9 became Tropical Storm Isaias in the overnight hours on Wednesday. It has become the ninth named storm of a very active 2020 hurricane season. As of the latest announcement from the National Hurricane Center (NHC) said Isaias was on track to strike South Florida on Saturday. The storm was moving northwest at 21 mph. It was approximately 100 miles west-southwest of Puerto Rico, and roughly 160 miles southeast of Dominican Republic with maximum sustained winds of about 60 mph – or about 14 mph shy of being classified as a Category 1 hurricane. The track this storm is going seems to be more of a threat to demand than to supply. Models show the storm hitting Florida and going up the East Coast. Most of the production areas, of course, are in the Gulf of Mexico. Plus, there is a new tropical disturbance coming off the coast of Africa that we may be talking about next week. 

The EIA reported that U.S. energy demand fell to the lowest level in 30 years because of the Covid-19 shutdowns. According to the EIA most recent Monthly Energy Review, the United States consumed 6.5 quadrillion British thermal units of energy in April 2020, the lowest monthly energy consumption since September 1989. Energy consumption in April 2020 was 14% lower than in April 2019, the largest year-over-year decrease in EIA’s monthly total energy consumption, a data series that dates to 1973. Before April 2020, the largest year-over-year change in U.S. total energy consumption occurred between December 2000 and December 2001, when consumption decreased by about 10% because of economic and weather-related factors.

U.S. crude oil imports averaged 5.1 million barrels per day last week, decreased by 0.8 million bpd, from the previous week. Over the past four weeks, crude oil imports averaged about 6.0 million bpd, 13.6% less than the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 924,000 barrels per day, and distillate fuel imports averaged 148,000 barrels per day.

Oil bulls are still in control but need to be patient as we are in this hungover post-Fed trading range. If we get progress on the U.S. relief bill, oil will rebound nicely. Despite all the macro madness, the data at some point will matter. Data is bullish.

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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