Being an Oil Bull Is Not as Lonely as It Was a Few Months Ago

Being an oil bull is not as lonely as it was a few months ago as the bullish fundamentals are becoming clear even to the most die-hard bears, says Phil Flynn of the PRICE Futures Group.

Despite skepticism that OPEC+ could keep it together and reduce global supply is now not in doubt. Global inventories are tightened, and we are seeing that cargoes are being bid up due to tightening supply. Oil is getting even more support from Saudi Arabia, now the world’s biggest oil exporter, when they agreed at an OPEC+ summit to make additional, voluntary oil output cuts of one million barrels per day (bpd) in February and March. This is one reason that oil is not getting to0 worried about a drop in OPEC compliance.

The latest S&P Global Platts survey of OPEC+ crude oil production for December, saw Libya’s oil revival and slipping compliance among members with quotas pushed the bloc’s output to a seven-month high. They put OPEC output at 25.43 mil b/d, non-OPEC allies added 12.74 mil b/d. That dropped compliance to 98.5% from 100.1% in November. Libya output hit the highest since June 2013. The UAE, Iraq also posted production increases while Nigeria dropped. Saudi Arabia production was 9.01 mil b/d, Russia at 9.10 mil b/d.

In fact, now with President Trump on the way out and President-Elect Joe Biden's desire to transition away from oil, it will give the Saudis a free pass to jack up the price of oil without the fear of a nasty tweet, giving the kingdom a large influence over global oil prices. This comes as China’s oil demand is soaring as it appears that China is way ahead of the rest of the world in recovering from the Covid-19 demand drop.

The crude oil market is holding up good even as the dollar starts to rally after months of a downtrend. Refining runs in the US and US exports should surge, drawing in US supply. Shale producers may not respond until we see oil solidly in the 50s but that is not dissuading some from securing Federal leases before President-Elect Joe Biden stops new leases. The AP reported that energy companies stockpiled public-land drilling permits in the Trump administration’s final months, an AP analysis of government data shows. The permits threaten to undercut President-elect Joe Biden's plans to curb drilling to address climate change.

Yet while they have the leases, can they get the capital to drill? More banks, in an attempt to go green, will not fund US oil and gas projects. Reuters reports that, “Major HSBC shareholders are calling on Europe’s biggest bank to toughen its commitment to cut lending linked to fossil fuels and to turn its climate “ambitions” into targets. Investors collectively managing some $2.4 trillion in assets have filed the resolution to be voted on at HSBC’s annual general meeting, after HSBC in October stated its ambition to get to net zero carbon emissions by 2050. That pledge was criticized by campaigners for not directly addressing HSBC’s lending to fossil fuel firms, including a relatively large share of clients involved in the coal sector. “HSBC is strongly committed to addressing climate change, in line with our clear ambition to align our financed emissions of our entire business portfolio to net zero by 2050 or sooner,” a spokesperson for the bank said.

The war on oil and gas is heating up and under President Joe Biden, we will be entering an era of sharply higher prices. Hedgers must be aware of this and hedge appropriately.

Reuters is reporting that “The surge to record highs for the price of spot liquefied natural gas (LNG) is being largely attributed to severe cold weather over much of northern Asia, but miscalculations by buyers of the fuel are probably a larger factor. The weekly spot price assessment settled at $21.45 per million British thermal units (mmBtu) on Jan. 8, eclipsing the prior record of $20.50 from February 2014. Prices have rallied an astonishing 1,060% since they hit an all-time low of $1.85 in May. There are also media reports of at least one transaction in the past week with a price of around $33 to $35 per mmBtu, which shows just how desperate some buyers are to secure supplies of the super-chilled fuel.

While there is no doubt the winter has been more severe than usual in northern Asia, with massive snowfalls in Japan and temperatures falling to the lowest since 1966 in Beijing, the weather alone can’t explain such a huge price spike. In late November when the spot price was just $6.40 per mmBtu, the message from importers for the top three buyers, Japan, China, and South Korea, was that they were comfortable with the LNG volumes they had secured for the upcoming winter.  The view was also expressed that even if the winter did turn out to be colder than expected, there was plenty of spot cargoes available, given the ongoing surplus of LNG production capacity. That comfort among buyers proved to be entirely misplaced, and the spot price started to surge from the week of Nov. 20 onwards as buyers were forced to re-assess the level of anticipated demand, natural gas inventories and the availability of spot cargoes.

Learn more about Phil Flynn by visiting Price Futures Group.