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
The OPEC cartel’s technical committee is trying to thread the oil needle by increasing oil production but not crash the global oil market price. While some fear that any production increase in global output will end the most significant oil price recovery on record, The reality is that data shows that very soon, the world is going to need more oil. I know that comes as a surprise to many that thought that the global glut created by the Covid 19 economic shutdown was going to keep us oversupplied forever. Yet low oil prices have done what low oil prices always do; they create demand growth and force lower production. We have seen global oil production fall dramatically because of the OPEC plus cuts but because of forced shut-ins and a major drop in U.S. oil production.
OPEC’s own data shows that the demand for its crude will surge by 25% in 2021 to an average 29.8 Million barrel per day, which will eclipse the demand level we saw in a pre-coronavirus world in 2019. So even with some OPEC cheating on production cuts, their mission to reduce oversupply has been very successful. Even the cheaters in the cartel may be a reason the OPEC cartel can ‘raise production’ but finesse it is such a way that it won’t kill prices.
Nigeria, Kazakhstan and Iraq have been the cartel members that let us say, did not live up to their commitments. So while compliant members of the OPEC cartel raise production by 2 million barrels a day in August, it actually will be 842,000 barrels a day less because of pledged compensatory oil cuts by the scofflaws in the cartel. That lowers the cuts to 8.542 million barrels a day down from a decrease of 9.6 million barrels a day.
The U.S. in the meantime is starting to feel the impact of falling OPEC output and lower U.S. production. The evidence is being n part in yesterday’s American Petroleum Institute report. The API showed a monster 8.322 million barrel crude draw. The bulk of the draw was in the Gulf Coast, and supply in Cushing Oklahoma increased slightly by 548,000 barrels.
The report also suggested the v shape recovery in gasoline demand is on track with a reported 3.611 million-barrel drop in crude supply. The only bearish aspect of the story was a 3.030 million barrel increasing distillate supply as plans are still in many cases on the ground.
There is also more evidence of falling U.S. oil production. Chief executive of Parsley Energy Matt Gallagher told the Financial Times that peak production that the United States hit back in March—13.1 million bpd on average—represented shale’s glory days, never to be repeated in his lifetime. Of course, in oil, you never say never, but U.S. shale does have issues, and it is taking its toll.
The Energy Information Administration (EIA) in new reports says that “U.S. crude oil and natural gas production in April had the biggest monthly decreases in years. Production of crude oil and natural gas decreased in the United States in April 2020 by 670,000 barrels per day (b/d) and 2.6 billion cubic feet per day (Bcf/d), respectively, according to the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report. Production declines of that magnitude usually arise only in natural disasters such as hurricanes: the drop in U.S. crude oil production in April was the largest since September 2008 when Hurricanes Gustav and Ike caused production to fall by 1.03 million b/d. The April 2020 decline in natural gas production was the largest monthly decrease since Hurricane Isaac-related shut-ins in August 2012.
April was the first full month to be affected by the low crude oil and natural gas prices related to the sudden drop in petroleum demand associated with coronavirus (COVID-19) mitigation efforts. The declining market-led oil and natural gas operators to shut-in wells and limit the number of wells brought online, lowering the output for the major oil- and natural gas-producing regions.
U.S. crude oil production decreased by 5.3% in April, and several states and regions reported declines. Texas saw the largest crude oil production decrease of 234,000 b/d (-4.3%) from March to April 2020. More crude oil is produced in Texas than in any other state or region of the United States, accounting for 41% of the national total in 2019.
North Dakota saw the second-largest decrease, 195,000 b/d, or 13.8%. Both Texas and North Dakota noted their largest recorded monthly decreases. Of the top six crude oil-producing states, Colorado was the only state to record an increase in April as a result of more new wells coming online than were shut-in.
Today we get the EIA Status Report. We expect a bullish report. Look at gasoline demand and falling us output. Low prices are curing low prices, my friend.
Natural Gas is still riding the heatwave. Andrew Weissman, of EBW says that the recent decline of the August natural gas contract is a testament to near-term weather sensitivity and continued market skittishness over end-of-season storage inventories. While the 1-10 day forecast lost 7 CDDs in the past week, spot demand may yet gain 2.5-3.0 Bcf/d by next Monday. Further, the July forecast as a whole has turned hotter as extreme heat lingers through the end of the month. Also, LNG feedgas demand has ticked higher, and early July natural gas production increases have fizzled. Modest gains are likely for NYMEX futures over the next 7-10 days. The lack of production gains and plummeting new well completions increase the probability of sharp natural gas supply declines into the fall—reducing the probability of a storage availability squeeze and allowing natural gas futures to move higher.
Make a move to invest in yourself. Tune into the Fox Business Network Invested in you! You also should call me to get signed up for my daily trade levels at 888-264-5665Questions? Ask Phil Flynn today at 312-264-4364