It always makes it interesting when the bulk of news for a particular commodity is very bullish yet the market acts in the opposite way. As we wrote before the 4th of July holiday, many times we can see a correction during bull markets just before and immediately after a major holiday. Yesterday we saw oil pullback about 10% from the peak. And while many think that is the end of the bull market for oil, the supply and demand numbers suggest and the news flow suggest that it is not. We had reports that air travel has hit the highest level since the pandemic and reports that gasoline demand snapped back after the post-holiday drop. Oil demand is hitting on all cylinders.
Oh sure, we again have renewed fears about the Delta variant of covid 19 and the news for oil is downside risk. Fears of a spike in covid cases and some restrictions sent global stocks and oil sharply lower. A perceived slow down in demand might make the OPEC Plus meager production increase look somewhat bigger. Yet unless the economy shuts down tomorrow, oil supplies are likely to continue to fall and demand will continue to rise.
Tonight we get the American Petroleum Institute (API) inventory report and evidence suggests that we should see a substantial drop in crude supplies as U.S. supply drains at a record pace. Private Forecaster GENSCAPE reportedly is showing storage at the Cushing, Oklahoma delivery point at only 39,231,182 mb. From Friday, Jul 09 that is down 1,264,490 million barrels but from July 13th, up 506,874. Macquire Research is also showing their refinery and pipeline model is calling for a draw of 2.3MB at Cushing on this week’s DOE report. Gulf coast supply should also be down and that should lead to at least a 4 million barrel draw overall.
The market may fret about more barrels from OPEC plus yet is less likely that we’re going to see a return of UN-sanctioned oil. The Wall Street Journal said that if the Iran talks failed, “The US is going to impose sanctions on Iran’s oil sales to China. That is a big threat to get Iran back to the table. Iran’s biggest illicit customer is China and if they lose that then their economy is in big trouble. The question will be how the incoming president of Iran, Ebrahim Raisi, reacts to threats. Or we will find out how good he is at orchestrating oil ship transfers to avoid potential U.S. sanctions. as president of Iran brings not just a new face to Iranian politics but also new problems for a Biden administration that hopes to ease tensions with Iran while reining in its nuclear ambitions.
A the end of the day, covid fears overtook the marketplace crushing not only the oil market but global stock markets as well. As with a lot of different commodities, it isn’t about reality it’s about covid and if a new round of covid becomes a reality, then we’re going to have big problems. We also were due for a correction and unless the stock markets crack again, the downside correction should be close to being over.
THE U.S. continues to retreat from the oil and gas market and OPEC Plus-Russia is there to pick up the pieces. Russia’s News Agency Tass reports that in the future, OPEC may double control on the oil market to 70-80% according to the Vice President of Russia’s Lukoil. Tass says that, “The contraction of the oil market due to the tightening of climate policy in the world will lead to the fact that the share of OPEC countries in the global market will increase from the current approximately 30% to 70-80%, Vice-President for the strategic development of Lukoil Leonid Fedun told reporters on Monday.“In general, we do not see any restrictions on the activities of our company under any development scenario. Even with the radical IEA scenario where oil supplies will decrease by 30%, we see that OPEC will simply increase its market share, from today to about 70 -80% of the market will be controlled by OPEC, “he said.
In more OPEC dominance news, The Wall Street Journal reports that, “Saudi-owned Motiva Enterprises LLC suspended a $6.6 billion plan to add petrochemical facilities to its refining operations in Port Arthur, Texas, according to people familiar with the matter.The decision to halt the project—which had envisioned the creation of the biggest refining and petrochemical operation in the U.S.—comes as Aramco dials back its diversification plans and refocuses on its core business of pumping oil and natural gas, according to the people.
The Wall Street Journal previously reported that Aramco had slowed the petrochemical project amid a review last year of investments at home and abroad. The review followed financial pressure from lower oil prices and a heavy dividend burden that Aramco took on when it went public in 2019. The plans could still change and the project could get the green light eventually. But the suspension won’t be revisited for at least a year, the people said.
The state-run company now plans to invest almost all of its $35 billion capital expenditure budget this year toward boosting oil and natural-gas production, according to people familiar with those plans. Aramco said last year it was working to increase its oil production capacity by one million barrels a day to 13 million barrels a day.
Five years ago, Saudi Crown Prince Mohammed bin Salman pledged to unshackle the economy from oil exports by 2020. But as the world’s top crude exporter seeks to maintain growth and generate jobs, the kingdom is redoubling its commitment to hydrocarbons. Amid moves by governments, investors, and other oil companies to transition away from fossil fuels and the greenhouse gases they emit, Saudi Arabia is betting that the world will need its crude for the foreseeable future.
Natural gas continues to get support as it looks like inventories are going to continue to be tight as hot weather and strong global demand keep us on a track. Inventories are going to stay well below the average range for it this time of year. The potential for a very expensive winter lies ahead unless Mother Nature gives us a break.
Bret Walts at Bamwx says there is an increased risk of a more widespread area of heat to close out July especially ~July 27-31. The Northern Plains will overall continue to run very warm regardless, but top global pattern drivers look to increase warmer than normal temperatures for the Midwest and Ohio Valley as well to close the month. Under a building ridge of high pressure, the Central Plains likely continue to run rather dry, likely increasing the ongoing abnormally dry conditions in Central Kansas. The highest threat for rain and storms will be in the Great Lakes and Eastern Ohio Valley in the upcoming 7-10 days.
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