Loose lips could sink ships in World War II but today the concern is that loose pumps might sink the oil market. OPEC drama after OPEC leaders rejected Russia’s proposal to raise oil production by 500,000 barrels a day in February caused the biggest correction in oil in weeks. Sure it did not help that England went into the third lockdown and Germany is going to stay in lockdown until February and Japan is considering another state of emergency for the Tokyo area because of Covid. Yet what seemed to shake the confidence of the oil bulls was fear that OPEC and Russia could cause another production war.

There were tensions after Russia seemed insistent on wanting to raise output but the Saudi Prince Abdulaziz warned that it was not time yet because the market is still fragile. He said that loose pumps might sink the oil market and traders agreed by selling the market off hard when they sensed that there may be no agreement. Yet a new day and hopes have dawned that Russia will relent at today’s meeting. Russia though always plays hard to get. Alexander Novak can get very entrenched in his position. Even the UAE who was on Russia’s side seems to be backing down. Regardless of the decision, the reality is that at least for this week, we should see inventory tighten.

Tonight we get the American Petroleum Institute (API) supply report. I expect to see at least a 4.1-million-barrel crude draw. Some are predicting even a larger draw. HFRI Research is calling for a 12,33 million barrel draw.  If correct that should help propel crude back towards the $50.00 a barrel area.

The product side must balance what has been recent strong demand recovery versus the possibility of more Covid lockdowns. For this week I am looking for gasoline supply to be down 2 million barrels and for distillates to be down 3 million barrels. Refinery runs should stay on their upward trend and should rise by 1.0 million barrels. Gasoline down 2.0 million barrels.

Winter whipsaw. Once again weather forecast is flipping. Last week natural gas traders sold the market off hard on the forecast for a warmer than normal January. Now forecasters are pumping up the possibility of a polar vortex that would make their last forecasts wrong again. Natural gas is rising dutifully on the new forecast. Yet the big story on natural gas is the LNG market. US LNG exports will stay near records. Demand in Europe and Asia, where they have had a cold winter along with relatively cheap U.S. prices, is keeping the market supported. 

Energy markets are also on edge to find out the outcome of the Georgia runoffs. If the democrats win both races, you can be sure there is going to be a wave of new regulations that will strangle the petroleum industry in the U.S.. Get ready for talking about the good old days when the U.S. used to be the world’s biggest producer. Get ready for the shock when they find out that the petroleum that we don’t produce will be produced in other places. It will only be dirtier and less efficient. Also, I would expect more layoffs in the petroleum sector if the dems win both. The upside might be a massive infrastructure build, that will be built with more imported oil.

Still, we believe higher oil prices are on track this year as they are one of the laggards in the great commodity comeback in 2020. If you look at  2020 commodity returns, the leader was lumber up 68% then silver +47%, Soybeans: +37% ,Palladium: +29% Copper: +26% Corn: +25% Gold: +24% Natural Gas: +16% Sugar: +15% Wheat: +15% Cotton: +13% Platinum: +10%  Cocoa: +2% Coffee: -1% Gasoline: -17% WTI Crude: -21% Brent Crude -22% Heating Oil: -27% . The odds are high that we are going to see the commodity sector shine as the cycle favors higher prices. Also, more restrictions on fracking means the U.S. energy industry will be hamstrung as it tries to respond.
Thanks,
Phil Flynn

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