The Phil Flynn Energy Report
Underinvestment Risk Rising
Oil prices are rising as the market is coming to grips with the fact that cap spending on petroleum is going to be woefully short of what we need. Saudi Arabia is already sensing an opening, cutting production to raise prices without any fear of an angry tweet and feeling free to manipulate prices higher. President-elect Joe Biden could unleash a rash of regulations that would constrict U.S. energy production, giving the Saudis even more price power. Shale producers will have a hard time reacting; not only are they drowning in debt, but many banks simply won’t lend money to the industry for energy projects because of goals to reach carbon neutrality. Even if they get the money, it’s unlikely that it will mean more production.
The Wall Street Journal reported that “Most American [oil] companies will have to give priority to paying off debts over boosting production in the wake of the pandemic, analysts say. Even with oil at $50, it would take the 20 largest U.S. shale companies 3.4 years on average to bring debt levels down to healthy levels relative to their overall capitalization, according to consulting firm Wood Mackenzie. In the meantime, we are seeing power and electricity prices spike in Japan and Europe.”
Strong demand and erratic plans to reduce carbon have left countries struggling to keep the lights on! What is this, California?
Oil prices are still in an uptrend. We expect that the breakout in oil is signaling a new day in the oil price comeback. The Wall Street Journal says that, “another factor driving bullish sentiment [is] busier traffic patterns in large U.S. cities. Congestion during rush hour in December rose in 27 of the 40 cities tracked by analysts at Tudor, Pickering, Holt & Co. Gains were led by demand centers in New York, Chicago, and Houston.”
Global cash cargoes are tight and China's demand is already exceeding pre-Covid-19 levels. On top of that, we should see U.S. crude supply fall this week in the inventory reports. Oil bears that were betting that OPEC+ couldn’t reduce supply or that Covid-19 would keep demand depressed forever are wrong and must cover.
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