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
Forget the tight physical oil market. Forget the fact that once the Strategic Petroleum Reserve releases end that we can see global supplies of oil plummet. Oil prices are starting the month of August on a negative note with fears of the Fed aggressively raising interest rates to ward off inflation and fear of the probable empty promises from OPEC achieved by Biden to raise production to cool off global energy prices. Yet data is raising fears of oil demand destruction even as supplies are very tight.
Bloomberg News Reported that, “European factory activity plunged and Asian manufacturing output continued to weaken in July amid lingering supply-chain complications and a slowing global economy.
Purchasing managers’ indexes for the euro area’s four largest members all indicated contraction, with shrinking confirmed for the region as a whole after an initial estimate on July 22. In Asia, it was China, South Korea and Taiwan that took the biggest hit.
In Asia, data showed China’s factory activity unexpectedly contracted in July, reversing earlier economic momentum as sporadic covid-19 outbreaks weigh on the recovery. The official manufacturing purchasing managers index fell to 49 from 50.2 in June. That compares with the 50.3 median estimate in a Bloomberg survey of economists.
At the same time oil prices plummeted when it was reported that Libya’s national oil company the NOC, lifted its force majure on oil exports and claim that their oil production was back up to 1.2 million barrels of oil a day.
We get weak market action on a Monday in August as the dog days of summer set in. There are some risk factors to the demand side of oil, but the reality is that the science that we are seeing is that the demand destruction argument is being overplayed. If global demand is so bad, then why did the United States have to export a record amount of oil and gasoline and diesel last week? if demand is so bad then why did Saudi Arabia raise your selling price for oil last week?
I know that U.S. oil exports are probably going to fall this week and but it’s clear that based on what we’re seeing in the physical market and what we’re seeing from Saudi Arabia, that does not suggest a substantial drawdown. In fact I would say that the demand risks to the oil market are to the upside. Remember the global oil market is playing with one hand tied behind its back and that is China.
China’s economy has slowed pretty dramatically because of their covid policies and the risk is that when they start to reopen, the demand side will far exceed the supply side. Obviously the war in Ukraine is a big issue.
The markets are looking at the fact that a grain shipment has left the Ukraine port as hope that Russia will be somewhat reasonable in the future when it comes to their dominance of energy supply to Europe. Reuters reported that the first Ukraine grain ship bound for Lebanon left port and Turkey says there are more ships to follow. Reuters wrote that, “A ship carrying grain left the Ukrainian port of Odesa for Lebanon on Monday under a safe passage agreement, Ukrainian and Turkish officials said. This is the first departure since the Russian invasion blocked shipping through the Black Sea five months ago. Ukraine’s foreign minister called it “a day of relief for the world”, especially for countries threatened by food shortages and hunger because of the disrupted shipments.
Oil bears got excited last week when OPEC suggested that maybe just maybe they might add a few extra barrels on top of the 400,000 barrels they previously agreed to increase production by. Reuters reports that OPEC’s new secretary general said that Russia’s membership in OPEC+ is vital for the success of the agreement, Kuwait’s Alrai newspaper reported on Sunday, quoting an exclusive interview with Haitham al-Ghais. He said OPEC is not in competition with Russia, calling it “a big, main and highly influential player in the world energy map”, Alrai reported. OPEC+ is an alliance of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia.
Any increase by OPEC, even a modest one, will reduce global spare production capacity and that is the issue. Global spare oil production capacity is at an all-time low and there is no room for error.
Fundamentally, not buying the weakness in the prices today as it seems to be part seasonal and part doldrums. The futures are still out of touch with the physical market and we believe that they will come back together. We think that there is some fear about what OPEC may or may not do and that is probably playing into some of the selling. Low liquidity isn’t helping with the volatility and I think hedgers should stay hedged.
A big drop in gasoline prices caused gasoline demand to snap back in the last couple of weeks. So, if this is about demand destruction and supplies are as tight as they are, can you imagine if the economy picks up a little bit what could we be facing. Shortages. The Strategic Petroleum Reserve releases has kept demand high because of cheap oil being dumped on the market but when you cut that off, we could see a price spike. At the same time the new climate bill is going to impose a lot of taxes on U.S. oil and gas producers that is going to severely reduce U.S. oil output in the future and cause prices to go even higher. These oppressive taxes on U.S. oil and gas companies are also going to make the world a less safe place because we’re going to become more dependent on countries like OPEC and Russia for supply. The Biden administration’s disdain for EU S oil and gas industry is clear.
Bloomberg reported that the climate and tax spending deal announced last week by Senate Majority Leader Chuck Schumer and Senator Joe Manchin could cost the oil industry $25 billion in new taxes. The legislation, which may get a Senate vote as soon as next week, would reinstate and increase a long-lapsed tax on crude and imported petroleum products to 16.4 cents per gallon, according to a summary of the plan released Sunday by the Senate’s tax-writing committee.
Natural gas dipped but still looks very bullish even more bullish if the climate bill passes. I wonder if somebody should tell the Biden administration that the reason why the United States saw the biggest drop in greenhouse gas emissions is because of our production of natural gas.
EBW analytics says that the August contract traded as high as $9.752 on Tuesday before natural gas relented later in the week. After a $4.00/MMBtu run higher in three weeks, the newly September front-month was primed for a pullback and rapidly slumped to test support at $8.01 on Friday. Over the weekend, twin bearish catalysts of a bearish mid-August weather shift and gas production racing higher to all-time daily records added to a bearish technical outlook. Although prices could fall further near-term, stout fundamentals may eventually provide support.
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