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
There are 60,000 reasons why oil prices are faltering. A grim report that showed a record U.S. daily cases of Covid 19 infection reported. While many of those cases maybe because of increased testing, the fear that this spike will reverse oil demand gains is a growing concern. Not just here in the U.S. but around the globe as well. In fact the International Energy Agency, (IEA), while caught by surprise by the swift recovering global oil demand, is warning that the rise in Covid cases is the biggest threat to demand and the oil price recovery.
The IEA says that “Global oil supply fell by 2.4 mb/d in June, to a nine-year low of 86.9 mb/d. Robust compliance with the OPEC+ output deal and steep declines from other producers, led by the United States and Canada, has cut world oil output by nearly 14 mb/d since April. If the OPEC+ cuts stay in place as agreed, global supply could fall by 7.1 mb/d in 2020 before seeing a modest recovery of 1.7 mb/d next year.
Global oil demand fell by 16.4 mb/d year-on-year in 2Q20 as lock-downs were imposed to combat the Covid-19 pandemic. Demand rebounded strongly in China and India in May, increasing by 0.7 mb/d and 1.1 mb/d M-o-M, respectively. World oil demand is projected to decline by 7.9 mb/d in 2020 and to recover by 5.3 mb/d in 2021. The recent increase in Covid-19 cases and the introduction of partial lock-downs introduces more uncertainty to the forecast.
For refiners, any benefit from improving demand is likely to be offset by expectations of much tighter feed-stock markets ahead. Refining margins will also be challenged by a major product stocks overhang from the very weak 2Q20. In China, through puts in June were estimated at a record level of nearly 14 mb/d. Global refinery runs are forecast to fall by 6.4 mb/d in 2020 to 75.1 mb/d and increase by 4.7 mb/d in 2021.
OECD industry stocks rose by 81.7 mb (2.64 mb/d) to 3 216 mb in May, rising by 2 mb/d since the end of 2019. In the US, preliminary data for June show that commercial stocks built by 24.7 mb (0.8 mb/d), led by products. In June, floating storage of crude oil fell by 34.9 mb from its all-time high in May to 176.4 mb. A tightening crude market balance and a flatter forward price curves reduced the incentive to store oil.
Crude prices increased in June for the second successive month. North Sea dated prices oscillated between $38-$43/bbl, supported by tighter fundamentals but capped by rising numbers of Covid-19 cases and economic uncertainty. By early July, prices were firmly above $43/bbl. The flatter contango seen recently will encourage crude stock draws. With ample stocks, product prices lagged crude, squeezing cracks and refinery margins. Freight rates continued to ease over the month.
Still while oil has faltered at 40 a barrel, we are still on a path of tightening supply. Unless we have a major rerun of a global economic shutdown, the worst should be over. Yet shutdown fears are weighing and if they continue it will mean that U.S. oil producers will have to start shutting in again.
Gas demand had been coming back. Will it continue? Lock-downs may not have the same impact on gas demand but we will see if Tropical Storm Fay has its way and do its own gas demand killing lock-down. Refiners on the East Coast also have to keep an eye on Tropical Storm Fay. Fox News reports that Tropical Storm Fay is expected to come closer to making landfall Friday with rain and flooding expected along the mid-Atlantic coast and southern New England. Tropical Storm Warnings and flash flood watches remain in effect for the tri-state coastal area, FOX 5 in New York reported and the worst of the rain in the area is expected Friday afternoon into Saturday morning. The storm had grown slightly stronger early Friday as it headed northward just offshore of the Delmarva Peninsula at 8 mph with top sustained winds of 45 mph, the National Hurricane Center reported. Fay was expected to bring 2 to 4 inches of rain, with the possibility of flash flooding in parts of the mid-Atlantic and southern New England, The U.S. National Hurricane Center. That’s down from earlier forecasts of about 3 to 5 inches of rain. A tropical storm warning remains in effect from Cape May, New Jersey, to Watch Hill, Rhode Island.
Dow Jones reports that Chevron Corp. said it was beginning the startup Friday of a gasoline-making fluid catalytic cracking unit after maintenance at its Pasadena, Texas, refinery. In a statement to the Texas Commission on Environmental Quality, the refinery said the startup process could last until Tuesday. The 110,000-barrel-a-day refinery is in the Houston area.
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