Oil prices have come all the way back from before the OPEC/ Russia price war. Both Brent crude and WTO have defied the skeptics proving once again that it is futile to fight global central banks. The catalyst for the overnight crude spike is the 750 billion euros ($860 billion) stimulus package in Europe that will feed demand and allow a risk-on attitude to drive markets higher and create economic forces that will burn more oil.

Even reports that might suggest that we may get an increase in crude oil supply is not slowing down this crude oil morning rise. Private forecasters are predicting a big crude build in Cushing, Oklahoma supplies. Macquarie Research is predicting a 1.6 million barrel crude increase in Cushing, Oklahoma. Genscape reported a build of 816,443 barrels. A rise in U.S. exports that may give us a build in crude supply even though if the Gulf Coast doesn’t bounce back, we could still get a crude draw. A Reuters poll of analysts indicated that U.S. oil stocks likely fell by around 2 million barrels in the week ended July 17.

Yet still, the Energy Information Administration (EIA) is warning that U.S. petroleum demand will remain below 2019 levels for several more months. The EIA reports that consumption of U.S. liquid fuels fell in March and April 2020 as a result of reduced travel related to COVID-19 and its mitigation measures. The U.S. Energy Information Administration’s (EIA) July Short-Term Energy Outlook (STEO) forecasts that U.S. consumption of total petroleum and other liquid fuels will continue increasing in the second half of 2020 as economic activity increases. Still, levels will remain lower than the 2019 average until August 2021.

In April, consumption of liquid fuels in the United States (as measured by product supplied) reached its all-time monthly low since the early 1980s at an average of 14.7 million barrels per day (b/d). Weekly data show consumption of petroleum products has increased as states have relaxed restrictions. Volumetrically, almost half of the decrease in U.S. consumption of liquid fuels in 2020 has come from reduced motor gasoline use. EIA expects motor gasoline consumption will average 8.3 million b/d in 2020, down 1.0 million b/d (10%) from 2019. In the second half of 2020, a forecast increase in employment leads to a rise in gasoline consumption. EIA assumes employment levels will continue to grow in 2021, and gasoline consumption will increase to 9.1 million b/d, or to about 2% less than its 2019 average.

The EIA expects U.S. jet fuel consumption in 2020 to be 31% lower than its 2019 average, a much larger percentage change than gasoline (down 10%), and distillate (also down 10%). U.S. jet fuel consumption fell to an estimated 660,000 b/d in the second quarter of 2020, and EIA expects it to rise to 1.4 million b/d in the fourth quarter of this year. EIA expects jet fuel consumption to continue rising in 2021 and average 1.5 million b/d, or about 12% lower than its 2019 average.

During peak stay-at-home orders, distillate consumption was relatively less affected by COVID-19 mitigation efforts than gasoline or jet fuel consumption. Distillate consumption in the United States is driven by economic activity and is more likely affected by slowing economic growth than by travel restrictions. Distillate fuel is also used in activities that are not as directly affected by restrictions, such as by diesel engines in heavy construction equipment and as heating oil both for space heating in buildings and industrial heating.

Geopolitical risk factors for oil will still be in play. Turkey getting involved in Libya is a major concern for stability in the region. The AP reported yesterday that Egypt’s parliament on Monday authorized the deployment of troops outside the country, a move that could escalate the spiraling war in Libya after the president threatened military action against Turkish-backed forces in the oil-rich country. A troop deployment in Libya could bring Egypt and Turkey, close U.S. allies that support rival sides in the conflict, into direct confrontation. President Abdel-Fattah el-Sissi has called the strategic coastal city of Sirte a “red line” and warned that any attack on the city, which sits near Libya’s main oil-export terminals and fields, would prompt Egypt to intervene to protect its western border.

Turkish-backed forces allied with the U.N.-supported government in Tripoli, the capital, are mobilizing on the edges of Sirte and have vowed to retake the Mediterranean city, along with the inland Jufra airbase, from rival forces commanded by Khalifa Hifter and based in the east.
U.S. oil products still are looking like a bottom. Buy breaks.

Natural gas is trying to get up off the mat. Sell rallies.
Thanks,
Phil Flynn

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