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Phil Flynn

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 prices are defying current oversupply and instead are focused on the start of the most significant oil production cut in history. According to Reuters, to get the deal done, President Trump suggested that if the Saudis did not cut production then he could nor restrain the hand of Congress to remove U.S. military presence in Saudi Arabia. That offer to the Saudi Arabians, along with other oil production cuts in the U.S. that are being forced upon producers and refiners by market conditions, has stabilized the global oil market.

Reuters reported that, “As the United States pressed Saudi Arabia to end its oil price war with Russia, President Donald Trump gave Saudi leaders an ultimatum. In an April 2 phone call, Trump told Saudi Crown Prince Mohammed bin Salman that unless the Organization of the Petroleum Exporting Countries (OPEC) started cutting oil production, he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the kingdom, four sources familiar with the matter told Reuters. Trump delivered the message to the crown prince 10 days before the announcement of production cuts. The kingdom’s de facto leader was so taken aback by the threat that he ordered his aides out of the room so he could continue the discussion in private, according to a U.S. source who was briefed on the discussion by senior administration officials. A senior U.S. official told Reuters that the administration notified Saudi leaders that, without production cuts, “there would be no way to stop the U.S. Congress from imposing restrictions that could lead to a withdrawal of U.S. forces.” The official summed up the argument, made through various diplomatic channels, as telling Saudi leaders: “We are defending your industry while you’re destroying ours.”

Reuters asked Trump about the talks in an interview Wednesday evening at the White House, at which time the president addressed a range of topics involving the pandemic. Asked if he told the crown prince that the U.S. might pull forces out of Saudi Arabia, Trump said, “I didn’t have to tell him.”

The market is starting to grasp the potential impact of what will be the most significant oil and product production retrenchment while respecting the current massive oversupply. The market is focusing as well on gasoline that is going to see demand rise faster than refineries refine it that are too are afraid of margins tanking. There are still concerns about June  crude oil delivery as Cushing, OK storage is filling. Yet the pace of increases is suggesting that some producers are considering alternative means of oil storage.

The Energy Report was one of the first to report that some frack water containers are now being repurposed from carrying frack wastewater to storing barrels of oil. Because of the enormous contango in the futures markets, people are looking at more ingenious ways to save it. You can still make big money if you can find storage. Buy it today and lock in a much higher price in the future when demand comes back, and production still will be restrained.

Stocks and oil pulled back, and gold had a sharp pullback after Christine Lagarde spoke yesterday. She said that she can’t solve the Covid-19 crisis and that the European Central Bank (ECB) can’t force banks to lend, nor governments to spend. She said that managing the Covid-19 crisis goes way beyond the powers of the central bank. So much for that “whatever it takes” thing. I think I miss Mario Draghi.

Still, gold-backed ETFs saw the highest quarterly inflows in four years amid global uncertainty and financial market volatility. The World Gold Council in its latest reports that, “Gold demand inched up to 1,083.8 tonnes (t) in Q1, supported by investment The global COVID-19 pandemic fueled safe-haven investment demand for gold, offsetting marked weakness in consumer-focused sectors of the market. Total Q1 demand grew marginally to 1,083.8t (+1% y-o-y). The coronavirus outbreak, which swept the globe during the first quarter, was the single most significant factor influencing gold demand. As the scale of the pandemic – and its potential economic impact – started to emerge, investors sought safe-haven assets. Gold-backed ETFs (gold ETFs) attracted huge inflows (+298t), which pushed global holdings in these products to a new record high of 3,185t. Total bar and coin investment fell to 241.6t (-6% y-o-y) as a 19% drop in bar demand (to 150.4t) overpowered a sharp jump in demand for gold coins, up 36% to 76.9t, due to safe-haven buying by Western retail investors. Jewelry demand, unsurprisingly, was particularly hard hit by the effects of the outbreak; quarterly demand dropped 39% y-o-y to a record low for our series of 325.8t. Technology demand also fell to a new low for our data series of 73.4t (-8% y-o-y). Central banks continued to buy gold in significant quantities, although at a lower rate than in Q1 2019: net purchases amounted to 145t (-8% y-o-y). The virus also caused disruption to the gold supply: mine production fell to a five-year low of 795.8t (-3% y-o-y).

For oil and products, early reports suggest that compliance to cuts will be high. Canada has shut in a million barrels of oil production. The U.S. will see production drop by over 2.0 million barrels a day overtime and OPEC+ will add their 9.7 million barrel. If you can survive the June delivery and the global economies continue to open up, we should be near the bottom.
Phil Flynn

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