Oil prices are on fire, hitting another two-year high and posting gains for a fifth week in a row. The reason for this string of gains is pretty simple, global oil demand is coming back faster than supply. U.S. oil production is sputtering and OPEC seems reluctant to add too many barrels even if it is clear that the global oil market is begging for more. The hope that sanctions would be lifted on Iranian oil seems very remote as Iran has missed a deadline to extend its monitoring deal with the International Atomic Energy Agency, further complicating nuclear talks. They say they could make a decision to return to the deal but we are still waiting. That will make OPEC plus job a lot easier because let’s face it, the cartel wants higher prices and that’s exactly what they are getting. India is putting pressure on OPEC+ to raise output. They are saying that OPEC’s actions are causing inflation in India. At the same time, drilling moratoriums in the U.S. and regulatory concerns are causing U.S. producers and oil investors to be overly cautious.
OPEC+ has its meeting on July 1 and there is some talk that they will increase production by roughly 500,000 barrels a day to 550,000 barrels a day but that seems to be a drop in the bucket as you look at the global rebound in demand. Demand is coming back fast and furious, faster than the naysayers thought was even possible. So much for that peak demand thing. We are going to see oil demand hit an all-time record high globally probably next year and the sad part about it is that we might not have the capacity to meet that growing demand. U.S. oil demand is back to 19.5 million barrels a day, according to the Energy Information Administration and that’s pretty much back to pre-COVID levels. There is a report that Chinese state owned crude oil refineries are operating at 82% of capacity which is a four year high. There was a report yesterday that Germany oil saw its biggest leap since the 1990s.
The problem is with more companies being forced to move towards net zero targets in the coming years, it’s going to come at the expense of fossil fuel production. While these efforts might be thought of as noble, it’s not going to be cheap. I guess you could argue that inflation could be transitory in some sectors but in the energy sector, especially for fossil fuels, it is here to stay.
And net zero is looking more impossible. Reuters reports that, “Governments around the world have been slow to take uncomfortable decisions to persuade consumers to cut energy consumption to help achieve climate targets, often because consumers are not ready to pay up or compromise their lifestyles. Researchers, policy makers and energy executives told a Reuters Energy Transition conference this week that while energy companies were under pressure to accelerate measures to reduce emissions, governments have barely addressed reducing demand for the fossil fuels that warm the planet. A growing population in Asia and booming consumerism in industrialized nations make most climate targets very difficult, if not impossible to achieve. Just this month, Swiss voters rejected environmental proposals by governments to help the country cut carbon emissions, including measures to raise a surcharge on car fuel and impose a levy on flight tickets.
Natural gas prices hit a 2.5 year high. Yes, the temperatures in many parts of the country are extremely hot and air conditioning use is high therefore electricity use is high. The export market for U.S. natural gas is also hot. Global demand for natural gas is really strong and we’re seeing the price of LNG in Asia sharply higher than where we were just a year ago. The supply squeeze for natural gas is on and we continue to see significant upside risks for natural gas.
Well we’ve talked about the super-cycle in the oil market for some time and now it seems like it’s going to hit natural gas as well. While we do have to be a bit careful as we are approaching the 4th of July holiday which can very often bring a peak to the market, at least from a seasonal perspective, running into this holiday next week we could see some real fireworks on the upside. We think there could be a real squeeze developing in oil and natural gas so even though we’re at very high levels it wouldn’t be a surprise to see a big move take place early next week before the holiday and before people start to take profits before the festivities begin. If we do get a sizeable correction around the 4th of July holiday we believe it would be a great time to lock in some long term trades. You should look at putting on some long term strategies. The crude oil market curve seems to suggest that the tightness is going to go on for a while but the back end of the curve is starting to heat up. Long dated options are still thin in the crude oil but they can be bought and if you’re selective you can find some strikes that are pretty attractively priced.