Stranded barrels and stranded people. Oil prices are coming back hard as reported Covid cases in China fall to zero, says Phil Flynn of the PRICE Futures Group.
Due to a deadly fire in the Gulf of Mexico, oil production by a Pemex oil platform is down by about 421,000 barrels per day of oil lost and 125 wells offline. Geopolitically, the US is praying for Americans stranded in Afghanistan and at the mercy of the Taliban as fears rise of a potential terror attack from ISIS and al-Qaida.
The oil demand side is looking up as the FDA granted Pfizer and BioNTech full US approval of their Covid-19 vaccine, which will make some companies mandate vaccines. It is clear that the oil market has priced in far too much oil demand destruction that will leave us short.
Bloomberg News reported that, "Oil stored in ships has been stacking up offshore. Asian ports in China have a crackdown on private crude oil processors and has blunted purchases and disrupted flows, including some US-sanctioned barrels from Iran. Vessels off Singapore, Malaysia, and China had about 62 million barrels last week after hitting a near three-month high earlier this month. Venezuelan oil and Iran’s heavier grade—commonly imported as a bitumen mixture—are among the varieties held. “These barrels sitting off Southeast Asia are distressed,” said Anoop Singh, Singapore-based head of East of Suez tanker research at Braemar ACM Shipbroking Pte Ltd. “They’re going to have a tough time finding homes other than China unless the situation surrounding the US sanctions changes dramatically, or China’s clampdown on its independents is eased. Still, that may be in the rear view mirror. China's handle on Covid means those barrels will not be stranded for long.
Natural gas is strong because of a heat wave in the Midwest, yet its production, or lack thereof, is giving this market potential for big moves this summer. The Energy Information Administration (EIA) reported that, "In 2020, annual production of associated-dissolved natural gas (or associated gas)—which is natural gas produced from oil wells—declined in the combined five major US onshore crude oil-producing regions for the first time since 2016. The share of associated gas produced in these five regions (Permian, Bakken, Eagle Ford, Niobrara, and Anadarko) declined by 1.5% year over year and averaged 37.7% of natural gas production in the regions.
Associated gas production averaged 14.2 billion cubic feet per day (Bcf/d) in 2020 (a 4.1% decline from 2019) amid a 9.2% drop in oil production in these regions. When natural gas dissolves in crude oil under the pressure of a rock formation, associated gas is released when the pressure on the crude oil is relieved by bringing it to the surface. Until 2020, the share of associated gas in these five regions, along with oil production, had been increasing. Between 2016 and 2019, associated gas production grew at its most rapid pace (6.1 Bcf/d) because of high levels of new crude oil production. Production of both crude oil and associated gas in 2020 declined with decreased demand for crude oil following responses to the Covid-19 pandemic.
Hopefully you used market weakness to get hedged on oil and natural gas and products. It is looking like the bottom is in so if we get a sharp break, look to buy.
Learn more about Phil Flynn by visiting Price Futures Group.