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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

While Fed Chairman Jerome Powell broke markets yesterday warning about the possibility of a prolonged recession, the oil numbers are telling a different story. Not only has gasoline demand risen back above 7 million barrels a day, the International Energy Agency [IEA] is saying that oil demand is coming back faster than expected from its historic losses.

The typically negative IEA seemed stunned that demand for oil is coming back as the world is seeing the most significant global oil production pullback in history.  The Wall Street Journal quoted Fatih Birol, the IEA’s executive director, as saying that “We see early signs of a gradual rebalancing of oil markets. It is still gradual, and it is still fragile.”

The IEA said that “Better than expected mobility in OECD countries and the gradual easing of lock down measures led to an upward adjustment of 3.2 mb/d to our global 2Q20 demand number, but it is still sharply down on last year by 19.9 mb/d. Although 2H20 will be slightly weaker than previously forecast, our outlook for 2020 as a whole shows a demand fall of 8.6 mb/d, 0.7 mb/d more than in our previous Report. A resurgence of Covid-19 is a major risk factor for demand.”

They also say that “Global oil supply is set to fall by a spectacular 12 mb/d in May to a nine-year low of 88 mb/d, as the OPEC+ agreement takes effect and production declines elsewhere. For some OPEC countries, e.g. Saudi Arabia, Kuwait and the UAE, lower May production is from record highs in April. Led by the United States and Canada, April supplies from countries outside of the deal were already 3 mb/d lower than at the start of the year.”

“The peak decline for global refining activity has shifted to May as our April throughput estimate was revised up on new data and higher demand. In 2Q20, global runs are expected to fall by 13.4 mb/d y-o-y, with 2020 average throughput down by 6.2 mb/d. Signs of refinery storage bottlenecks started multiplying at the beginning of May, with several refineries in Europe, Asia and Africa reported to be closed for an indeterminate period.

OECD data for March show that industry stocks rose by 68.2 mb (2.2 mb/d) to 2 961 mb. Total OECD stocks stood 46.7 mb above the five-year average and, due to the weak outlook, now provide an incredible 90 days of forward demand coverage. Preliminary data show that U.S. crude stocks built by 53.7 mb in April (1.8 mb/d), and crude inventories in Europe and Japan also rose by 3.1 mb and three mb, respectively. In April, floating storage of crude oil increased by 9.9 mb to 123.8 mb.”

The Energy Information Administration also reported better than expected demand as well as more oil going into the SPR. They also saw another drop in U.S. production, but most importantly, a 3 million barrel drop in the Cushing, Oklahoma, storage hub.  Some of that oil ended up in the Strategic Petroleum reserve, which saw supply increase by 1.9 million barrels. While the storage hub is 80% full, some were predicting that this was the week that it would be full. The draw reduces the chances greatly for sub-zero pricing, but those concerns persist.

John Kemp at Reuters writes that the “Front-month Jun futures contract (CLM0) still has 138 million barrels due for delivery, with four trading sessions before expiry. Nearly -17 million positions were closed out yesterday. But the liquidation rate will have to accelerate significantly soon to avoid a repeat of the volatility that marked the previous expiry.”  Yet this time, Kemp says that it is the  WTI short-sellers are the ones under pressure as June contract heads towards expiry, with prices climbing and trading towards the top of the range since the contract became the front month. Opposite from the expiry of May contract when it was longs under pressure. So is it possible that instead of a price break on oil, we could see a short squeeze going into expiration? Stay tuned!

It was surprising to see rbob futures fall as U.S. gasoline demand, and U.S. gas production are almost even. Gas production is at 7.5 million barrels a day. Add some exports and imports, and the rbob gas market could get really tight really quickly. Yet after a decent run, the market allowed the negative comments from Jerome Powell about the downside risks to the economy ,and Dr. Anthony Fauci’ s potential upside risks on coved 19, to have them take profits. Yet today comments from the IEA on oil market balance along with an expectation that OPEC plus will extend production cuts beyond the next OPEC meeting in June are giving bulls the edge.

That, along with supportive data from the EIA that showed U.S. commercial crude oil inventories actually fell by 700,000 barrels, and total commercial stocks fell as well by 500,000 barrels, Gasoline fell by 3.5 million barrel, and distillates increased by 3.5 million barrels.

The EIA also shows that US production fell to 11.6 million barrels a day.

So if you do not know who to believe about the pace of the economic recovery, just look to the gas and oil demand numbers because they are probably your best gauge in a world of uncertainty. At the same time, do not bet against the U.S. as we will come out of this more robust than ever. Hopefully, based on the demand numbers, that will be sooner rather than later.
Thanks,
Phil Flynn

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