Oil Fund Flip

11/10/2020 10:00 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Oil funds got caught short as the demand outlook improves with hopes that we will get a coronavirus vaccine. There will be more pain for the shorts as they have to exit positions, says Phil Flynn of the PRICE Futures Group.

The market was betting big on more extensions of lockdown and more demand destruction. The possibility of a vaccine means planes will again fly at some point, and people may go back to normal. While the vaccine is still months away, the trade must adjust for a demanding comeback that should come back faster than production.

The Saudi oil minister is hinting that the OPEC+ cartel may tweak the market to adjust for more production from Libya and possibly Iran in the future and offset the weakness we have seen from Covid-19 demand destruction. The Russian energy minister, Alexander Novak, who got a promotion in his final days as energy minister, says that it is, "Too early to talk about changes to the OPEC+ deal before JMMC Committee meets." Of course, that kind of comment and bad-cop attitude probably led to Mr. Novak's promotion. Novak helped start the price war with Saudi Arabia, and President Trump ended it.

Bloomberg reported that Russian energy minister Alexander Novak is set to be promoted to deputy prime minister amid a government reshuffle, while retaining his role as the oil-rich nation's OPEC+ negotiator. Prime Minister Mikhail Mishustin said Monday on state television that he asked the State Duma, the lower house of parliament controlled by the ruling party, to approve Novak as a new deputy. Nikolay Shulginov, the chief executive officer at state-controlled utility RusHydro PJSC, was proposed as the new energy minister. Novak, 49, has led the Energy Ministry since 2012. He has represented Russia in talks with the Organization of Petroleum Exporting Countries, helping to forge historical links with the cartel. He will continue to be responsible for that relationship, said a government official familiar with the situation. The spokesman for Russia's government declined to comment when contacted by Bloomberg.

If OPEC stays the course and the vaccine news continues to be good, we should see global oil supply get back to normal levels, and oil should start working its way back into the '50s.

In the meantime, gasoline demand is weak, and prices in some parts of the country should fall below $2 a gallon. Yet the RBOB futures are acting like we have seen the lows, so look to buy breaks. Still, Reuters reports that, "Renewable fuels with Democratic President-Elect Joe Biden set to enter office with a divided Congress, legislation supporting demand for products like renewable diesel could garner bipartisan support.

Natural gas is still under pressure from the weather. Hurricane Eta is causing demand destruction along with warm temperatures across the county. Bloomberg reports that, "Texas’s oil regulator reduced routine natural gas flaring, but its efforts fall short of more aggressive measures requested by some investors and major producers. The Railroad Commission of Texas changed the application form for producers wanting to burn off excess gas, it said in a statement. Producers will have to provide more detailed reasons on why they want to flare and more data and show efforts to reduce emissions.

The new application process will reduce flaring times by 50% to 80% in some circumstances, the commission said, without providing specifics. The measures do not change the state’s flaring rule and do not include any targets. In a public comment period, European majors BP Plc and Royal Dutch Shell Plc called on the regulator to beef up its proposed changes and end routine flaring. Investors AllianceBernstein, California State Teachers’ Retirement System, and Legal & General Investment Management argued this should happen by 2025.

As far as reports this week, it is mixed up because of the celebration of Veterans Day. Tonight, the American Petroleum Institute (API) releases its inventory report. The Energy Information Administration will delay their report until Thursday. So, for oil, the API will be more critical than usual. 

Learn more about Phil Flynn by visiting Price Futures Group.

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