There is more evidence that the predictions of “peak oil demand” were greatly exaggerated. OPEC in their latest monthly report predicted that we would see global oil demand exceed 100 million barrels a day in 2022. Just think of that number. The 100 million barrels a day mark is about 20 million barrels above the demand level that peak oil production believers told us we would never be able to produce. The peak demand folks that just a year ago were predicting that covid-19 had put in place the all-time top for fossil fuel demand, have to go back to the drawing board and reconfigure their estimates. Will peak demand everl occur. The peak demand crowd is probably going to be as wrong as the peak oil production people were 20 years ago.

OPEC says that, “World oil demand growth in 2021 is forecast at 6.0 mb/d, unchanged from last month’s assessment, although there have been some regional revisions. Total oil demand is projected to average 96.6 mb/d. The 1Q21 was revised lower, amid slower than anticipated demand in the main OECD consuming countries. This was counterbalanced by better-than-expected data from OECD Americas in 2Q21, which is now projected to last through the 3Q21. Solid expectations exist for global economic growth in 2022.

These include improved containment of covid-19, particularly in emerging and developing countries, which are forecast to spur oil demand to reach pre-pandemic levels in 2022. World oil demand is anticipated to rise by 3.3 mb/d y-o-y in 2022, while total world oil demand is projected to average 99.86 mb/d, with the 100 mb/d marks exceeded in2H22. OECD oil demand is anticipated to increase by 1.5 mb/d, as OECD Americas is expected to rise firmly with US oil demand only marginally below 2019 levels, mainly due to lagging transportation fuel demand.

Non-OECD oil demand is projected to show an increase of 1.8 mb/d, with gains in China and India exceeding pre-pandemic levels, supported by a respectable recovery in transportation fuels and firm industrial fuel demand, including petrochemical feedstock.

While these oil demand expectations are very bullish in the long run, in the short term we’ve seen one of the worst stretches for prices in a couple of months. There are many reasons. The first reason is the 4th of July peak. Many times, as we have stated before, there is a bit of a correction around the 4th of July, then consolidation, and then depending on the fundamentals, the next move higher or lower begins.

We feel very confident that the move most likely will be higher. That is mainly because USA oil inventories will continue to fall dramatically in the next couple of months.

Another reason we saw the oil price drop is because of the uncertainties surrounding the OPEC Plus Russia agreement. While there was a lot of talk about a compromise between Saudi Arabia and the UAE, so far there is no deal. It seems that there was a disagreement as to how long they should keep this new agreement in place.

The other problem that they’re having is that other countries now are looking at the deal that the UAE is getting and they want more barrels for themselves, That leads to a larger fear for oil traders that this little dispute could blow up and end up into another oil production war.

One other reason why we sold off is simply due to option expiration. We saw a big unwinding of some of the time spreads in oil. It seemed like we had a lot of financial jockeying going on as the clock ran out on the August options.

There was also some concern about the covid-19 variance and whether or not that would lead to more lockdowns of the global economy, thereby putting downward pressure on demand. There were peripheral reports of slowing demand in India and China, though the trend for both of those countries seems to have demand on an upward trajectory.

We think that the oil correction phase will end soon though it might be a little choppy here for the next couple of weeks. We believe that once the reality starts setting in surrounding the tight supply situation in August, we should see this market resume its trek to new highs. You should expect to see a great opportunity to lock in hedges. So if you have an upside risk to oil prices, this might be a good opportunity to get hedged. I know I sound like a broken record when it comes to the hedging side of the equation. For the last year I continue to warn people to get hedged because of the potential upside risk in prices. Those risks have not gone away. We are facing a market that is going to be undersupplied even if OPEC does agree.

Natural Gas and grains are looking at the possibility of a very hot and dry stretch of weather. Top-notch weather service forecaster Bret Walts at Bamx.com says that overall, the biggest heat in the next 7-10 days will be across North Dakota, South Dakota, and Minnesota for the Ag Belt. Generally, these are the areas that have struggled the most with drought conditions. While a few areas, especially SD, may get some rain this weekend (locally heavy but not widespread) these same areas will see little moisture in the next 7-10 days or so.

Elsewhere, the Ohio Valley to the East Coast and the southern tier of the U.S. stays more seasonable to the cooler so no major spikes in cooling demand coming up. We’ll need to watch 10 days from now for some better moisture chances to return across the Midwest but whether it’s heavy or widespread enough to continue to put dents in this drought, remains to be seen.

Thanks,
Phil Flynn

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