The Phil Flynn Energy Report
The Odds are Rising
The odds that OPEC+ will raise production are rising as reports are coming in that demand is rising faster than originally anticipated. Global oil markets start a new month after a complex set of challenges created some incredible volatility in August.
As traders start to come back from the summer holidays, they’ll be faced with an oil market that’s seeing mixed signals from the global demand outlook. On the one hand, global demand is at a point where inventories are falling by roughly 2,000,000 barrels per day (bpd), but on the other hand, there are fears of the possibility of demand destruction from the Delta variant of the Covid-19 pandemic. Hardcore demand numbers combined with an undersupplied global market is one of the reasons why OPEC+ will more than likely follow through with their agreed-upon 400,000 bpd production increase in September.
Yet, there’s been some talk that OPEC+ is a little bit concerned about their oil demand forecast and the potential risk from Covid-19. OPEC+ still sees a global supply versus demand deficit, so even if they raise production at this meeting, perhaps next year we’ll see very little from them.
Reports overnight show that members of the OPEC+ cartel may reevaluate their 2022 oil demand growth forecast of 4.2 million bpd from a previous forecast of 3.28 million bpd. This comes after the OPEC joint technical committee (JTC) said that they expect that OECD oil stocks will remain below the 2015-2019 average until May 2022. That is further out than their previous forecast when they expected oil stocks to be below average only until January 2022.
OPEC+ is trying to gauge how the lockdown of China for the first 3 weeks of August will play out. China is now reopening its economy, which could mean that demand will surge. What's weird is that even as Chinese demand faltered in August, global inventories continued to fall. One of the reasons may be U.S. oil demand, which surged to pre-pandemic levels. The Energy Information Administration said that U.S. oil demand was at 20.537 million bpd in June, up by 2.959 million bpd or 16.8% YoY, down 117 bpd or 0.6% versus June 2019.
For the price of crude oil, I believe this comes down to whether or not OPEC+ is going to err on the side of keeping the global market undersupplied. What that means is global inventories will probably continue to fall, which will give us a very bullish outlook long term. In the short term, of course, we’re looking to the tragedy in the Gulf Coast.
New Orleans and Mississippi continue to try and get a gauge as to when things can start getting back to normal. A report yesterday showed that there’s been little progress in bringing back online Gulf oil and gas production; that will probably improve today, but we still have 13% of the U.S. refining capacity offline and 2.3 million bpd of capacity because of 9 shut refineries.
The good news is that the Colonial pipelines are up and running, moving product. I believe this is going to create a lot of problems for inventories in the coming weeks, but our sense of the underlying demand in the United States and around the world is going to mean that we'll see a pretty explosive move to the upside in the price of oil at some point.
We have the same type of outlook on natural gas. Tight supplies of LNG in Europe will keep U.S. exports high and desirable. U.S. production continues to falter as demand grows, so we have a very bullish outlook for winter.
The debacle in Afghanistan and the speech by Joe Biden shows a leader who’s out of touch with reality and his leadership and policies will become more of a factor in global oil prices. For example, Iran is ignoring U.S. sanctions and essentially exporting as much oil as they want to. Iranian oil exports are now estimated to be at a whopping 3 million bpd and rising.
There are signs that the Biden administration knows that a deal with Iran to get back to the nuclear talks is unlikely. They’re going to plan B and working with Israel to come up with a way to thwart the rogue state from getting a nuclear weapon.
In the meantime, China is becoming more aggressive with Taiwan. China is now vowing to go in and rebuild Afghanistan after the incredible failure and chaotic U.S. withdrawal.
North Korea is restarting its closed nuclear power facility. The Wall Street Journal reported that North Korea appears to have restarted its Yongbyon reactor, which produces plutonium and was likely shut down in December 2018. Our enemies are emboldened and they're testing this president more every day.
Joe Biden said the chaotic withdrawal from Afghanistan was a success so therefore, it was a success. In Biden’s world, there are no losers when it comes to his decisions. If things go wrong, there’s always someone else to blame. You can blame President Trump; you can blame the Afghanistan leadership; you can blame the Afghanistan army; you can blame our allies; you can blame American citizens who didn't take their warnings to exit the country; but at the end of the day, don't blame Joe Biden.
There was a lot that bothered me about his speech. President Biden seems to contradict himself in many ways: He said that he promised to get out of Afghanistan, but blamed president Trump for setting the timeline to get out. He blamed President Trump for making a deal with the Taliban, but Biden himself decided to give full control of the withdrawal to the Taliban.
The AP reported that “[t]he U.S. left Afghanistan’s Bagram Airfield after nearly 20 years by shutting off the electricity and slipping away in the night without notifying the base’s new Afghan commander, who discovered the Americans’ departure more than  hours after they left, Afghan military officials said.”
This is not how a proud, strong nation acts. A terrible shame and legacy for Biden.
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