Stranded barrels and stranded people. Oil prices are coming back hard as reported Covid cases in China fall to zero and oil production due to a deadly fire in the Gulf of Mexico by a Pemex oil platform is down by about 421,000 barrels per day of oil lost and 125 wells offline. Geopolitically, the U.S. is praying for Americans that are stranded in Afghanistan and at the mercy of the Taliban as fears rise of a potential terror attack from ISIS and al-Qaida.
Yet do not say stranded because the Biden administration takes exception to that term. The New York Post reported that, “White House Press Secretary Jen Psaki on Monday scolded a journalist who asked her about Americans “stranded” in Afghanistan — insisting it is “irresponsible” to use that term despite numerous reports of Americans being unable to board flights out. “I think it’s irresponsible to say Americans are stranded. They are not. We are committed to bringing Americans who want to come home, home” Psaki said at her daily press briefing.“ We are in touch with them via phone, via text, via email, via any way that we can possibly reach Americans to get them home if they want to return home.” When pressed by Peter Doocy of Fox News on whether Americans are stranded, Psaki added, “I’m just calling you out for saying that we are stranding Americans in Afghanistan when I said — when we have been very clear that we are not leaving Americans who want to return home. We are going to bring them home and I think that’s important for the American public to hear and understand.”
On the oil demand side it is looking up as the FDA granted Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) full U.S. approval of their covid-19 vaccine which will make some companies mandate vaccines. If indeed China has delta under control so quickly then it is clear that the oil market has priced in far too much oil demand destruction that will leave us short.
Yet the market was worried about China demand and more covid and it did have some impact. Bloomberg News reported that, “Oil stored in ships has been stacking up off key Asian ports as a crackdown in China on private crude oil processors has blunted purchases and disrupted flows, including some U.S.-sanctioned barrels from Iran. Vessels off Singapore, Malaysia and China had about 62 million barrels last week after hitting a near three-month high earlier this month, according to intelligence firm Kpler. Venezuelan oil and Iran’s heavier grade — commonly imported as bitumen mixture — are among the varieties held, Kpler said. “These barrels sitting off Southeast Asia are distressed,” said Anoop Singh, Singapore-based head of East of Suez tanker research at Braemar ACM Shipbroking Pte Ltd. “They’re going to have a tough time finding homes other than China, unless the situation surrounding the U.S. sanctions changes dramatically, or China’s clampdown on its independents is eased. Still that may be in the rear view mirror. China’s getting a handle on covid means those barrels will not be stranded for long.
Natural gas is strong because of a heat wave in the Midwest yet it is production or lack thereof that is giving this market potential for big moves this summer. The Energy Information Administration (EIA) reported that, “In 2020, annual production of associated-dissolved natural gas (or associated gas)—which is natural gas produced from oil wells—declined in the combined five major U.S. onshore crude oil-producing regions for the first time since 2016. The share of associated gas produced in these five regions (Permian, Bakken, Eagle Ford, Niobrara, and Anadarko) declined by 1.5% year over year and averaged 37.7% of natural gas production in the regions. Associated gas production averaged 14.2 billion cubic feet per day (Bcf/d) in 2020 (a 4.1% decline from 2019) amid a 9.2% drop in oil production in these regions. When natural gas dissolves in crude oil under the pressure of a rock formation, associated gas is released when the pressure on the crude oil is relieved by bringing it to the surface. Until 2020, the share of associated gas in these five regions, along with oil production, had been increasing. Between 2016 and 2019, associated gas production grew at its most rapid pace (6.1 Bcf/d) because of high levels of new crude oil production. Production of both crude oil and associated gas in 2020 declined with decreased demand for crude oil following responses to the covid-19 pandemic.
Hopefully you used market weakness to get hedged on oil and natural gas and products. It is looking like the bottom is in so if we get a sharp break, look to buy.