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
Oil bulls scored a knockout going into ‘Boxing Day” after the American Petroleum Institute (API) reported a 7.9 million-barrel crude draw. It appears that the API wanted to make up for the lost time and this reflects growing global oil demand. With stocks at record highs, and the trade war truce around the corner, the global oil demand outlook will continue to rise.
The perception of a well-supplied market may be chilled a bit in the coming months as we see record demand for oil in China and expectations that Indian oil demand will also surge. We also have the OPEC plus Russia production cuts of 2.1 million barrels per day (bpd) of supply off the market as of Jan. 1, or about 2% of global demand. That comes at the same time as the new International Maritime Organization (IMO) rules that will force the marine sector to reduce sulfur emissions by over 80 percent by switching to lower sulfur fuels.
Refineries ramped up as Cushing Oklahoma supply fell by 2.2 million-barrels, and modest temperatures helped see a 1.68 million-barrel increase in distillates. That is great news because the new International Maritime Organization (IMO) rules go into effect on January 1st. They still need to build supply. Gasoline saw a modest 556,000 barrel increase. The crude draw would be largest since August if EIA data confirms tomorrow.
U.S. Oil production, while near a record, may falter because of declining production. Bloomberg reports that “America’s top shale field is becoming increasingly gassy as drilling slows down, undercutting profits for explorers at a time when investors are demanding better returns. Natural gas has long been a nuisance in the Permian Basin in Texas and New Mexico, where a massive glut weighs on prices, with crude producers sometimes having to pay to get it hauled away or burn it off in a controversial practice known as flaring. Now the problem is intensifying as wells age and fewer new wells are drilled. Shale wells produce a spew of oil when they’re first fracked, but over time, production falls — sometimes as much as 70% in the first year — and gas can more than double, becoming a bigger part of the mix. It’s an issue that’s made worse when subsequent wells are drilled too close to the initial one or when there’s interference from another producer’s neighboring wells.” So lower your crude forecast.
Old King Coal is not a merry old soul. The Wall Street Journal points out that “Coal prices are on course for their biggest annual fall in more than a decade, hurting producers of the fossil fuel but cutting raw-material costs for struggling steel makers. The spot price of thermal coal, which is burned to generate electricity, has tumbled 39% to $52.35 a metric ton so far in 2019, according to S&P Global Platt’s. If prices don’t rebound before the end of the year, the decline would be the largest one-year drop since Platt’s started compiling the benchmark price in 2007.
Factors driving thermal-coal prices lower include a downturn in power demand, an abundance of liquefied natural gas, and China’s push to become more self-sufficient in coal. Meanwhile, slowing steel production in Europe, India and Japan has triggered a slump in the price of coking coal, which steel mills use to manufacture the alloy metal. Spot prices have fallen by 38% this year to $136 a metric ton.
The coal-price slide has hit U.S. producers hard, contributing to a series of bankruptcies at firms, including Blackhawk Mining LLC and Westmoreland Coal Co. But cheaper coal will ease the pressure on steel producers in Europe, where falling sales and rising costs have pinched profit margins.
The world has consumed less coal in 2019 than in 2018, the International Energy Agency said last week, largely because coal-fired electricity generation is set to fall by over 250 terawatt-hours or more than 2.5%. That would be the biggest drop on record and has been led by a large decline in the amount of thermal coal used by U.S. and European power stations. Thermal coal has fallen out of fashion fastest in Europe, where natural gas is cheap, regulations on fossil fuels are tightening and some investors are pushing for cleaner sources of energy. “The future of coal in Europe is debatable—you can’t hide from what’s in front of you,” said a London-based coal broker.”
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HOT COMMODITY PODCAST!In case you missed it! Phil’s guest appearance on the McKeany-Flavell Hot Commodity Podcast last Friday, September 20th talking about current energy market dynamics. LISTEN HERE!Questions? Ask Phil Flynn today at 312-264-4364