Oil prices are on the rise after China reportedly will cut in half its quarantine period from visitors overseas. That is raising expectations that China is starting to get its covid problem under control. That is also raising expectations that we will see a further reopening of the Chinese economy, thereby tightening global oil supplies that are already tight. Javier Blass at Bloomberg points out that dated to frontline swaps extend gains above $5.10 per barrel, the highest level since at least 2010.
The North Sea crude market is flashing super-extra-uber signs of tightness, worse than in the aftermath of the Russian invasion of Ukraine in late February.
S&P Global (NYSE:SPGI) reports that China’s crude throughput is set to rise month on month in June as refineries resume operations from maintenance amid expectations of demand recovery from pandemic-led movement curbs, data from S&P Global Commodity Insights showed June 28. However, the increase is expected to be capped by high product inventory as demand recovery is slower than expected. In contrast, oil product exports remained low, with two Sinopec (NYSE:SHI) refineries hit by fires earlier in June.
Global data showed China’s four state-owned refiners lifted their average utilization rate to 75% from a two-year low of 73.4% in May, suggesting a gain in throughput on the back of higher runs at independent refineries.
This is a situation that is causing a lot of distress in the G7, which doesn’t seem to have a reasonable plan to deal with Russia in the aftermath of this war. They are talking about some type of a price cap on Russian oil, creating a buyer’s cartel that will fail because Russia will restrict supplies. A price cap will make the situation even worse.
The energy situation is so bad that the French President Emmanuel Macron told Biden that the UAE told him that Saudi Arabia and the United Arab Emirates can barely increase oil production and have little spare oil production capacity. Biden seemed to be a bit confused by what he meant, and the UAE came back and clarified what they meant by spare capacity. That was based upon their OPEC production quota, yet the bottom line is spare production capacity is still a major issue underpinning global oil prices.
Spare production capacity is expected to fall below 2,000,000 barrels of oil a day. In fact, the situation is so desperate that Biden is getting pressure from the French President to lift sanctions on both Iran and Venezuela in an attempt to replace Russian oil supplies. So I guess if you’re Iran and Venezuela, all you have to do is to wait around for someone to be more outrageous than you and more dangerous than you, and you’re going to be rewarded by being able to sell your oil on the global market.
Reuters reports that the international community should explore all options to alleviate a Russian squeeze of energy supplies that has spiked prices, including talks with producing nations like Iran and Venezuela, a French presidency official said on Monday.
Everywhere gas supplies are still below normal and refining capacity, as everyone now has learned, is extremely tight, and we can barely keep up with demand. It’s so important to hope that the tropical storm activity brewing in the Gulf of Mexico doesn’t damage either the production side or the refining side. Make sure you keep an eye on this with the Fox Weather app.
In fact, Fox Weather reported that the Atlantic hurricane season is picking up speed as the National Hurricane Center is tracking not one but three disturbances across the Atlantic and Gulf of Mexico.
The tropical disturbance is producing a large area of showers and thunderstorms in the central tropical Atlantic Ocean, strengthened into Potential Tropical Cyclone 2 on Monday, and will likely become Tropical Storm Bonnie as of the NHC’s Monday night’s forecast. Potential Tropical Cyclone 2 is currently located about 590 miles east of Trinidad. The system is now expected to cross the southernmost Caribbean islands near or over Trinidad and Tobago late tomorrow or early Wednesday. On the current track, it would reach the islands of Aruba, Bonaire, and Curaçao late Wednesday into early Thursday.
Based on recent developments, it does appear like the correction in oil is over. Yesterday we saw some weakness in the oil products like heating oil and diesel versus crude, and that probably had a lot to do with the expiration of the contracts. We will be waiting for the OPEC decision later on next week, and they are keeping their cards close to the vest. The risks are still skewered to the upside across the petroleum complex.
Natural gas also looks like it may have bottomed. Part of the risk-on that we see in oil could filter into the natural gas market every day that goes by. We are getting closer to the point where Freeport will reopen. The Freeport export terminal really put a damper on the natural gas rally.
The Department of Energy reports that energy jobs have rebounded, after sharply declining in 2020 due to the COVID-19 pandemic and subsequent economic fallout. In 2021, energy jobs grew 4.0% from 2020, outpacing overall U.S. employment, which climbed 2.8% in the same time period. The energy sector added more than 300,000 jobs, increasing the total number of energy jobs from 7.5 million in 2020 to more than 7.8 million in 2021.