About The Author

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

The crude oil bull market was a not so smooth transition from the Covid 19 inspired demand crash. Now with President Trump promising a smooth transition, to President-Elect Joe Biden the oil trade knows that policies are coming that will make oil prices higher. Brent crude hit $55.00 for the first time since last February, a time before covid 19 became a household word. The drive back to that covid price recovery has been driven by producer restraint as well as improving demand, not to mention forced austerity by oil producers that had to cut capital spending by over 100 billion dollars. Those cuts more than likely went too far and taking millions of barrels of future oil production off-line at a time that, despite all of the green energy investment, will still be needed. 

Those oil cuts are being felt already in the U.S. shale patch and are one of the reasons that US oil production is down by 2 to 3 million barrels of oil a day. Despite the skepticism that OPEC plus Russia could put aside their differences and work tighter to reduce global supply, the success of the cuts is now clear. What is also clear is that it is a lot easier to cooperate when your back is against an economic wall and disaster is all around.

Oil demand is still surging in China and other parts of Asia and there are more signs that already global supplies are getting squeezed. Javier Blas of Bloomberg tweeted that, “After Saudi Arabia surprised the market with an output cut, traders bought **seven** benchmark North Sea cargoes on the Platts window yesterday — that’s likely a record number for a single day, signaling a tightening market. Unipec was the largest buyer.”

Now the oil market will get even more support in the short term as commodity funds start to rebalance. The annual re-balancing of these funds begins today will last for five days leading to more buying for oil.  Bloomberg News reports tens of billions of dollars’ worth of commodity investments are about to be switched around in a move that is set to cause a wave of oil-futures buying. Tens of billions of dollars worth of commodity investments are about to be switched around in a move that is set to cause a wave of oil-futures buying. While the move happens every year, crude is a 20% decline in 2020 means that the value of oil index investments has been far below its target for months. As a result, as much as $9 billion of oil contracts could be purchased over the five days of re-balancing that start Friday, according to Citigroup Inc., at a time when the market has already surged to 10-month highs.

While the move happens every year, crude is a 20% decline in 2020 means that the value of oil index investments has been far below its target for months. As a result, as much as $9 billion of oil contracts could be purchased over the five days of re-balancing that starts Friday, according to Citigroup Inc., at a time when the market has already surged to 10-month highs.

The move affects the world’s two biggest commodities indexes — the S&P GSCI Index and the Bloomberg Commodities Index. Crude has recovered from its coronavirus-driven rout and so far this year has been benefiting from Saudi Arabia’s unilateral output cuts, a surge of investments to hedge reflation and coronavirus vaccines. Markets are now abuzz with talk of the next tailwind for prices: commodity indexes plowing into another 80 to 100 million barrels of crude futures contracts. “It’s a big deal,” said Gary Ross, a veteran oil market watcher, and chief executive officer of Black Gold Investors LLC. “If you start increasing financial length by 80-100 million barrels, you push up the price $2-$3, all other things being equal” as reported by Bloomberg.

The Polar vortex is breaking down Oh no! Natural gas traders that were getting excited about the Polar vortex are backing off a bit as some forecasters show that it will not perhaps bring the cold that some thought that it would. Still with exports strong, use weakness to put on more summer calls. Global demand for US natural gas exports will be high as US prices are the cheapest on the planet. The Energy Information Administration reports that In 2020, natural gas spot prices at the national benchmark Henry Hub in Louisiana averaged $2.05 per million British thermal units (MMBtu), the lowest annual average price in decades. Prices started the year relatively low because mild winter weather led to less natural gas demand for space heating. Prices remained low as economic effects induced by the COVID-19 pandemic reduced both natural gas production and consumption.

Beginning last March, spring weather and responses to COVID-19 drove down natural gas demand, further lowering prices. The Henry Hub price averaged $1.66/MMBtu in June, the lowest monthly price in decades. Prices increased in the second half of the year because of lower natural gas production and an increase in liquefied natural gas (LNG) exports.

Consumption of natural gas in the United States decreased among residential, commercial, and industrial users. In contrast, natural gas use for electric power generation rose, based on the U.S. Energy Information Administration’s (EIA) monthly data through October 2020 and estimates for November and December. Natural gas consumed to generate electric power in the United States reached a record high, averaging 31.6 billion cubic feet per day (Bcf/d) in 2020, or 2% more than the 2019 average. This increase occurred despite slightly lower total U.S. electricity consumption this year. Natural gas consumed by electric power plants set a daily record high of 47.2 Bcf at the end of July, according to S&P Global Platts estimates, because of record-high summer temperatures and low summer prices.

Production of dry natural gas averaged 90.9 Bcf/d in the United States during 2020, or 2.2 Bcf/d less than in 2019, after reaching a monthly record high of 97.0 Bcf/d in December 2019. The production decline reversed a three-year trend of consistent growth in U.S. natural gas production. The number of rigs drilling for natural gas began declining in the United States during the spring, reaching a record low of 68 natural gas-directed rigs in July. The rig count stayed relatively low throughout the rest of 2020. 

In the summer of 2020, U.S. exports of LNG were affected by hurricanes and by changes in demand for natural gas in Europe and Asia, but exports increased in the final months of the year.
Thanks,
Phil Flynn

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