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Energy Report: Out Of Control

Published 01/07/2021, 09:28 AM
Updated 07/09/2023, 06:31 AM
CL
-2.60%
USO
-2.64%
President Trump has lost it, the election as well as common sense. The loss of life at the Capitol riots was inexcusable and the rule of law should be supreme. Yet while the markets reacted to the storming of the Capitol with a quick drop and a spike in the Vix fear index, the resilience of the market suggested that despite the unrest, there was unwavering confidence in the United States.
 
Even the oil market dipped sharply for a downward spike a bit as protestors stormed the capital but quickly recovered. It instead focused on the bullish fundamental outlook for oil as well as what a Biden administration will mean for oil prices. More regulations and a transition away from oil as president-elect Joe Biden calls it. It is a clear signal that we are entering an era of higher prices.
 
This comes as oil saw support from a supportive Energy Information Administration (EIA) that most notably reported that for the first time since 1986 that the US imported no oil from Saudi Arabia. This historic milestone shows not only the success of US shale oil producers but as the success of the kingdom in implemented the OPEC Plus production cuts. While the naysayers said OPEC Plus cuts after the production war would do little to get rid of global oversupply, instead missed another historic turning point in the global oil market story, a story that in 2020 was like no other. Add to that Saudi Arabia’s decision to make a voluntary production cut of 1 million barrels daily (bpd) over the next two months will apply to exports, Bloomberg reported, citing Minister of Energy Prince Abdulaziz bin Salman, “This is a commercial, not a political, option,” he said and reported by Aregaam. The minister added that the Kingdom has the capacity to withstand the reduction, and it will be similar to the output cut, which was implemented in June 2020 in cooperation with the UAE and Kuwait.
 
The drop in Saudi oil imports helped engineer an 8 million barrels drop in weekly crude oil supply. That cut supplies to just 9% above the five year average for this time of year.  We saw gasoline inventories increased by 4.5 million barrels last week and are at the five year average for this time of year. This is interesting because we are seeing refiners cut back gas inventories to where there is not much oversupply. On top of that, the closing of US refineries means that when US gas demand comes back we will be more dependent on gasoline imports.
 
The EIA reported that distillate fuel inventories increased by 6.4 million barrels last week and are about 4% above the five year average for this time of year. This comes as reports that jet travel is at the highest level since the covid shutdowns began.
 
Compact News reported that a South Korean delegation left for Iran on Thursday to negotiate the early release of an oil tanker and its crew seized in strategic Gulf waters this week.  Iran’s seizure of the tanker came after Tehran had urged Seoul to release the $7 billion (€5.7 billion) of Iranian assets frozen in South Korea under US sanctions.

Iran’s Revolutionary Guard Corps troops on Monday stormed the South Korean-flagged MT Hankuk Chemi as it navigated the Strait of Hormuz, a narrow waterway between the Persian Gulf and the Gulf of Oman, and forced the vessel to a nearby Iranian port. Iranian officials said the vessel was seized for violating maritime environmental laws as it was carrying 7,200 tons of “oil chemical products.” The Guards said they arrested crew was from South Korea, Indonesia, Vietnam, and Myanmar.

The EIA reported that U.S. regular retail gasoline prices averaged $2.17 per gallon (gal) in 2020, 44 cents/gal (17%) lower than in 2019, and the lowest annual average since 2016. Gasoline prices at the beginning of the year were more than $2.50/gal; however, responses to the COVID-19 pandemic resulted in widespread reductions in passenger travel and gasoline demand, contributing to lower gasoline prices across the United States. U.S. gasoline prices averaged $2.38/gal in mid-March, just before a national emergency was declared. Gasoline prices fell for several consecutive weeks, ultimately reaching $1.77/gal on April 27, the lowest average price since early 2016, according to the U.S. Energy Information Administration’s (EIA) Gasoline and Diesel Fuel Update. Vehicle travel in April fell to its lowest monthly level on record, according to a Bureau of Transportation Statistics data series that dates back to 2000.

Vehicle travel and gasoline demand (measured as product supplied) began to increase in May, relative to April levels. From May through the end of the summer, U.S. gasoline inventories remained high because of sustained lower demand, even as refiners reduced gasoline production because of lower margins.  In most years, U.S. gasoline prices tend to be highest in the summer, when gasoline demand is usually higher. However, in 2020, U.S. gasoline prices were highest at the beginning of the year. Of the 10 cities surveyed in EIA’s Gasoline and Diesel Fuel Update, 8 cities registered their highest gasoline prices for the year on January 6, and the remaining 2 cities (Chicago and Houston) registered their annual highs the following week, on Jan. 13.

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