Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
You have heard about the so-called Fed put. That is a term that means the Federal Reserve has the markets back. If the markets or economy start to falter, the Fed’s plunge protection team will get into gear and adjust monetary policy to create a floor for the market. That in turn gives investors confidence to take on more risk because even if the market gets weak, the Fed won’t allow it to crash. Now with the recent rebound in oil, traders are now talking about the Saudi put. That is that Saudi Arabia will not allow oil prices to fall and if it does, they will cut production accordingly. In fact, the Saudi announcement that they want $80 a barrel of oil and that they will reduce their exports by 800,000 barrels a day is sending a signal to the market that the worst for oil may be over.
Of course, it helps that the global stock markets are showing more optimism. So called progress on the U.S. China trade discussions is bringing the risk appetite back into the marketplace and cumulative measures talked about in Asia to boost their economy is changing the pessimism about overall energy demand. A senior Chinese official said China plans to introduce policies to boost domestic spending on items such as autos and home appliances this year. This comes after China lowered their reserve requirement for bank lending that, along with more stimulus should raise oil demand expectations.
This comes as the American Petroleum Institute reported that U.S. crude supplies fell by 6.1 million barrels for the week ending January 4, according to sources. This massive drop in supply is showing that previous cuts by the Saudis are already showing up and this could be the beginning of a massive drain on U.S. oil supplies.
Of course, that is looking forward. In the short-term, the big drop in crude was offset by mind boggling builds in products. The API reported that gasoline stockpiles surged by an astounding 5.5 million barrels, while distillate inventories rocketed by 10.2 million barrels. The post market reaction seemed to shrug off the product build and focus more on the crude draw.
U.S. shale operators are still in pullback mode and with the OPEC cuts about to drain our supplies, the bottom in oil looks solid. Of course, if we see a reversal or panic in stocks that could change, but for now the new oil uptrend will be your friend.
Yet despite the price drop in the big picture, energy supply prospects for the future continue to brighten. Reuters reported that BP struck black gold discovering two new oilfields in the Gulf of Mexico that could bring an additional billion barrels of oil at an existing field, thanks to new seismic technology.
Reuters writes “ The company has put a heavy emphasis on technology and data processing capabilities in recent years in order to unlock new resources and cut costs. The $1.3 billion Atlantis Phase 3 development will include drilling eight wells and a new subsea production system that will boost BP’s production by 38,000 barrels of oil equivalent per day (boed). It is scheduled to start production in 2020. Together with the new discoveries, BP aims to grow its Gulf of Mexico production from over 300,000 (boed) at present to 400,000 (boed) by the mid-2020s. BP said that new seismic technology helped it identify an additional 1 billion barrels of oil at its Thunder Horse field within weeks, whereas previously it would have taken a year to analyze”. Remember peak oil and you can’t drill your way to energy independence? Neither do I.
Hellenic Shipping News reports that the middle distillates complex in Asia rolled out 2019 on diverging paths. While the gasoil market has made a strong comeback since plummeting to its lowest level on December 21, co-distillate jet fuel continued to remain sluggish. Market sources said that this trend was likely to continue for the rest of the month, citing diverging fundamentals between the two products.
Despite the Asian gasoil market kicking off the year on a steady footing, some traders cautioned that looking forward, the middle distillate might be on track for a sustained recovery from here . Some traders hold a more bullish sentiment for the Asian gasoil market in the near term, pointing out that volumes flowing out of the region has helped to ease the overhang in supply. “For January, Asia exported over 1 million mt of gasoil out of the region,” a trader said, adding that gasoil might see an overall improvement in fundamentals.
Conversely, the Asian jet fuel/kerosene spot market started the year on a weaker footing, as a glut of surplus cargoes pressured cash differentials deeper into discount territory. While demand has been steady amid the ongoing winter season, market participants continued to point to a ready availability of cargoes from South Korea, and China.
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