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Energy Report: Rubber Room

Published 04/07/2021, 09:45 AM
Updated 07/09/2023, 06:31 AM
Oil traders both bullish and bearish have been bounced around in recent days like they are locked in a rubber room. Since the break of the sharp oil uptrend, prices have whipsawed driven by headlines and fear. Fear of rising covid cases that may hurt demand and fears that the Biden administration infrastructure plan may never pass. The restarting of the Iranian nuclear accord talks seemed to go ok according to sources from Iran, but it appears that both sides are still far apart as far as the lifting of U.S. sanction.
 
Yet already Iran is selling oil to China without any fear that the Biden administration will try to enforce sanctions while they try to get Iran back in the 2015 accord. At the same time geopolitical risk factors are rising. There are signs that Russia may soon get into a conflict in the Ukraine and a shadow war between Iran and Israel heat up.
 
The Wall Street Journal reports that, “An Iranian ship thought to be used by Iran’s elite military force was attacked Tuesday near Saudi-Yemeni waters, both U.S. and Iranian officials said, in an apparent escalation of a conflict between Iran and its regional foes. The attack of the ship, believed by U.S. officials and others in the region to be used for intelligence collection by Iran’s Islamic Revolutionary Guard Corps, was attacked Tuesday in the Red Sea, officials said.
 
The attack came as international talks to revive a nuclear accord between Iran and the U.S. started in Vienna. It came after revelations last month, reported by The Wall Street Journal, that Israel has been targeting ships carrying fuel and weaponry from Iran to Syria for about the past 18 months. At least a dozen ships have been targeted, according to the Journal report. Oil traders must wonder how long this shadow war stays in the shadows. The risk of more of an escalation could prove to be an increasing risk factor for global oil supply
 
The American Petroleum Institute (API) report seemed to raise more questions that it answered. The API reported that crude oil supply fell by 2.618 million barrels yet a shocking 4.553-million-barrel increase in gasoline supply had traders scratching their heads. Distillates reportedly increased by 2.810 million barrels. The Energy Information Administration will release their version of the report and I expect that it will look much different than the API.   

The EIA in their Short Term Energy Outlook said that, “in the 2021 summer driving season (April–September), the U.S. Energy Information Administration (EIA) forecasts U.S. regular gasoline retail prices will average $2.78 per gallon (gal), up from an average of $2.07/gal last summer (Summer Fuels Outlook).

Higher forecast gasoline prices reflect higher forecast crude oil prices, higher wholesale gasoline refining margins, and higher U.S. consumption of motor gasoline. For all of 2021, we expect U.S. retail prices of regular-grade gasoline to average $2.66/gal and retail prices for all grades to average $2.78/gal, which would result in the average U.S. household spending about $480 (31%) more on motor fuel in 2021 compared with 2020.

EIA expects U.S. gasoline consumption to rise in response to growing levels of GDP and employment. In addition, as COVID-19 vaccines are more widely distributed, we expect that driving will increase, causing gasoline consumption to rise. We forecast that U.S. gasoline consumption in 2021 will average 8.6 million barrels per day (b/d), which is up from consumption in 2020 of 8.0 million b/d but down from consumption in 2019 of 9.3 million b/d.

Brent crude oil spot prices averaged $65 per barrel (b) in March, up $3/b from February and up $33/b from March 2020, the onset of the COVID-19 pandemic in the United States. Rising Brent prices in March continued to reflect expectations of rising oil demand as both COVID-19 vaccination rates and global economic activity have increased, combined with ongoing crude oil production limits from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+). EIA forecasts that Brent prices will average $65/b in the second quarter of 2021, $61/b during the second half of 2021, and $60/b in 2022.

The EIA expects global oil inventories to fall by 1.8 million b/d in the first half of 2021. Forecast increases in global oil supply will contribute to a mostly balanced market during the second half of 2021. However, the forecast depends heavily on future production decisions by OPEC+, the responsiveness of U.S. tight oil production to oil prices, and the pace of oil demand growth, among other factors.

EIA expects OPEC crude oil production will rise from an average of 25.1 million b/d in the first quarter of 2021 to 25.8 million b/d in the second quarter. The increase is the result of the April 1 OPEC+ announcement to begin raising production targets in May. It also reflects Saudi Arabia unwinding voluntary cuts of 1.0 million b/d between May and July.

As you know, we have been in the bull camp for over a year, and we are still in that camp. I believe that after this period of consolidation we will break out to the upside. We believe that the market is underestimating the rebound in demand and the ability of the production side to meet that demand.

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