Oil Prices Can't Shake the Fear

10/01/2020 10:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The oil market can't shake its demand-fear funk even though US oil supply continues to tighten, explains Phil Flynn of the PRICE Futures Group.

The Energy Information Administration (EIA) reported a surprise two-million-barrel drop in crude supply as refiners crept back from their decline. Yet while refiners came back, lingering demand concerns makes the market less concerned about the trend of tightening supply.

Rising hopes for a Covid-19 relief package that would, of course, help domestic gasoline demand seemed thwarted after Senator Mitch McConnell said that the two sides were still far apart. Nevertheless, the talks between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin continues. Perhaps there is a deal to be had, and if it happens, oil and products should get swept away in a flurry of risk-on buying. President Donald Trump signed stopgap spending legislation to avoid a government shutdown, which should be a positive sign.

Another positive sign for global demand comes out of India. Reuters reported that, "Indian state refiners' annual gasoline sales rose to pre-Covid levels in September. A fall in diesel sales slowed, as the loosening of lockdown restrictions boosted energy consumption and economic activity, provisional industry data showed. Last month, gasoline sales by state refiners saw their first annual growth since March, underpinned by a gradual lifting of coronavirus curbs even as India suffers one of the highest infection rates in the world.

India's fuel consumption—a proxy for oil demand—was hard hit by a nation-wide lockdown imposed in March to stem the spread of Covid-19. Indian state retailers sold 2.2 million tonnes of gasoline last month, up 1.85% from a year ago as the sale of passenger cars surged. Motorists are increasingly relying on personal vehicles to commute amid rising coronavirus cases. Gasoline sales were up 10.5% from August. Gasoil sales were at 4.84 million tonnes, down 7.3% from a year ago but up 22% from August, according to data provided by the country's top refiner Indian Oil.

US gasoline demand did rise, but it was a bit subdued. Still, the EIA showed total motor gasoline inventories increased by 0.7 million barrels last week and are only 1% above the five-year average for this time of year. Even distillate fuel inventories fell by 3.2 million but are 21% above the five-year average for this time of year. The distillate glut in the US and Europe is still a significant challenge for refiners. Total commercial petroleum inventories decreased by 0.6 million barrels last week.

Smoke gets in your eyes. It also can block the sun. If you block the sun, then your solar panels might not work. The Energy Information Administration (EIA) reported as much. "In the first two weeks of September 2020, average solar-powered electricity generation in the California Independent System Operator (CAISO), which covers 90% of utility-scale solar capacity in California, declined nearly 30% from the July 2020 average as wildfires burned across the state.

Wildfire smoke contains small, airborne particulate matter particles that are generally 2.5 micrometers or smaller (referred to as PM2.5). This matter reduces the amount of sunlight that reaches solar panels, decreasing solar-powered electricity generation. As of September 28, California wildfires have burned an estimated 3.6 million acres in 2020, an area about the size of Connecticut. So how do you think that zero-emission thing is going to go for them?

Futures have been hot! MarketWatch reports that natural gas and lumber are among the best performers as commodities post a second straight quarterly gain. Commodities posted an increase for a second consecutive quarter on the last day of September, with natural gas and lumber among the best performers even as COVID-19 clouded the outlook for the global economy. The Bloomberg Commodity Index BCOM, 0.13%, which tracks 23 commodities, climbed by roughly 9% for the third quarter this year. The index rose by about 5% in the second quarter.

Natural gas futures NGX20, 0.99% were up by more than 44%, while lumber futures LB00, +1.29% LBX20, +1.29% tacked on roughly 40% for the period, according to Dow Jones Market Data. Natural gas futures scored their biggest quarterly percentage climb since the second quarter of 2016. There was a much faster rebound in European [liquefied natural gas] demand than was anticipated in the throes of the coronavirus shutdown. At the same time, a pullback in US production was deeper and more sustained, leading to a tighter outlook for 2021 supply.”

Lumber futures, meanwhile, have been a standout all year amid strong demand for the commodity even as the shutdowns linked to the coronavirus led to a significant slowdown in global economies. Prices reached a record settled at $928.50 per 1,000 board feet on Sept. 1.

Learn more about Phil Flynn by visiting Price Futures Group.

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