The Phil Flynn Energy Report
Trying to Find Balance
In a world full of turmoil, we are striving to find balance not only in the energy markets but around the world. Tension surrounds the globe with riots in major U.S. cities and increasing strain between the U.S. and China. Despite this turmoil, markets are holding better than one might expect.
Oil prices have traded on both sides of unchanged after Friday's late rally on plunging oil rig counts and OPEC+ speculation. Talk of OPEC pushing up the date of its meeting to June 5th and talk that they’re in negotiations to extend the record production cuts past the July end date, is supporting the market even as global tension fears could potentially thwart demand. While Russia is warning the market to not get ahead of itself because negotiations are ongoing, there’s a sense that the cuts will be extended and perhaps added to for a couple more months.
U.S. oil production should continue to fall. On Friday Baker Hughes said that the number of active U.S. rigs drilling for oil declined by 15 to 222 this week. The oil-rig count has now fallen for 11 weeks in a row, suggesting further declines in domestic crude output. The total active U.S. rig count, meanwhile, also fell by 17 to 301, according to Baker Hughes. The plunge in rigs is reflective of an industry that’s still in contraction. That’s a strong source of underlying support for oil prices.
Trade concerns though are weighing on oil. Bloomberg News reported that, "Chinese government officials told major state-run agricultural companies to pause purchases of some American farm goods including soybeans as Beijing evaluates the ongoing escalation of tensions with the U.S. over Hong Kong, according to people familiar with the situation. State-owned traders Cofco and Sinograin were ordered to suspend purchases.” The move could raise concerns about a trade war that could hit global oil demand again.
Unrest in American cities is also taking its toll on oil demand. Cities that are just trying to reopen may get shutdown as violence for the sake of violence is threating the economic recovery. Protests over the death of George Floyd has expanded into senseless violence that does no good for anyone. Injustice is never solved or made right with more hate and injustice. In Chicago the protest has canceled rail and bus service and workers are being told to stay home.
Still we look at the resilience of this market. While the turmoil may slow the recovery, an extension of OPEC+ cuts will give the bulls the upward track.
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