Rollback and rollover. News that California was rolling back its economic re-opening caused a sharp reversal as stock and oil rolled over, giving back its day’s gains. Shutdown fears and uncertainty about OPEC raising oil output shook the confidence of oil market bulls as well, especially if the U.S. economy starts to again shutdown. Yet even Dr. Anthony Fauci says we do not have to shut down the economy, but pull back a bit. That may suggest that some of the sharp pullbacks might be a pre-mature knee-jerk reaction. U.S. stocks are trying to come back, and oil is getting back some of its losses after data that showed that Chinese imports from the U.S. rose for the first time since the new coronavirus hit. Chinese imports of U.S. goods jumped by 11.3% in June from a year earlier, after a 13.5% drop in May, as data from Beijing’s General Administration of Customs reported. China’s June crude oil imports hit both daily and monthly highs.

The next big driver for oil will be after the OPEC meetings. OPEC’s Joint Technical Committee meets on today, with the Joint Ministerial Monitoring Committee due to meet on Wednesday. Reuters says that under the existing supply pact, OPEC+ is set to taper its record production cut of 9.7 million barrels per day (bpd) to 7.7 million bpd from August through December. The Joint Ministerial meeting makes its announcement tomorrow as it seems that the U.S. oil supply will start to dwindle in the coming weeks on reduced imports and falling U.S. production and rising oil demand. For OPEC, it is a big decision. Talk of increasing production by 2.0 million barrels probably makes sense in real terms, but psychologically, it could hurt this market.

Yet the reality is that demand destruction from thew coronavirus, while historical,  was not as bad as initially feared according to data. HFRI research points out that, “The Organization for Economic Co-operation and Development (OECD) Counties inventories in May rose far less than people expected, growing only at a clip of 2.64 mb/d. From January to May, the average build has only totaled ~2 mb/d, implying a deficit of 2 mb/d is needed to bring OECD inventories back to normal. But more importantly, IEA noted that floating storage fell by 34.9 bbls in June.

Natural gas prices are getting a boost from the heat but does not change the fact that natural gas prices are low. How cheap? The Energy Information Administration says that In the first half of 2020, natural gas prices at the U.S. Henry Hub benchmark reached record lows. The average monthly Henry Hub spot price in the first six months of the year was $1.81 per million British thermal units (MMBtu). Monthly prices reached a low of $1.63/MMBtu in June, the lowest monthly inflation-adjusted (real) price since at least 1989. Prices started the year low because of mild winter weather, which resulted in less natural gas demand for space heating. Beginning in March, spring weather and the economic slowdown induced by mitigation efforts for the coronavirus disease 2019 (COVID-19) contributed to lower demand, further reducing prices.

Warmer-than-normal temperatures in January through March resulted in more natural gas than average in underground storage at the end of the heating season. The traditional heating season runs between November 1 and March 31. Injections into underground storage so far during the 2020 refill season (April 1 to October 31) have also been relatively high, lagging behind only 2019 and 2015 for total net injections for the Lower 48 states through May. High storage levels indicate high natural gas production relative to consumer demand. Contributing to high U.S. storage levels and lower prices have been a decline in liquefied natural gas (LNG) exports. Demand for U.S. liquefied natural gas exports has fallen by half in the first half of 2020, from 9.8 billion cubic feet per day (Bcf/d) in late March to less than 4.0 Bcf/d in June. U.S. industrial demand is down by 0.6 Bcf/d, or 2.7%, compared with the first half of 2019.
Thanks,
Phil Flynn

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