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EIA Weekly Data: The EIA data on Wednesday June 16th was mixed. The headline Commercial Crude Inventories data was bullish for crude as it fell 7.4Mb (forecast of a draw of 3.3Mb) to 466.7Mb as Refinery Utilization rose 1.3% to 92.6% last week (last year was 73.8% and two years ago, 93.9% as refiners ramped up for the summer holiday driving season). As a result more product was created and the bearish information was that Gasoline Inventories rose by 2.0Mb. The big decline was due to Net Imports falling 845Kb/d or by 5.9Mb on the week. This occurred as Exports rose by 953Kb/d or by 6.7Mb on the week.
The rapid increase in US drilling activity is now impacting US Crude Production. Last week production rose by 200Kb/d to 11.2Mb/d (but is still down from 12.2Mb/d in mid-June 2019 but up 700Kb/d from a year ago). Over the coming months we see US crude production lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows are reinvested to stabilize production volumes which are still declining for many producers.
Total Product Demand rose by 2.86Mb/d to 20.57Mb/d. It is getting close to the demand of mid-June 2019 which was 20.81Mb/d. Gasoline Demand rose by 880Kb/d to 9.36Mb/d (9.93Mb/d in mid-June 2019). Jet Fuel Consumption rose 227Kb/d to 1.26Mb/d (1.67Mb/d in mid-June 2019). Cushing Inventories fell last week by 2.1Mb to 43.6Mb compared to 46.8Mb last year.
Baker Hughes Rig Data: The data for the week ending June 11th showed that the US rig count rose by five rigs (down one rig in the prior week). Canada had a large 16 rig increase (up by 15 rigs in the prior week). Canadian activity is now up 440% from the pandemic lows of last year. There are 93 rigs working in Canada now compared to 21 rigs working last year. Of the Canadian increase there were 16 more oil rigs working last week, or 59 rigs working, up from just seven last year. In the US there were 461 rigs active, up 65% from 279 rigs working a year ago. The Permian basin added four rigs and now has 236 working, up from 137 rigs working last year at this time or up by 72%.
The increase in rig activity in both the US and Canada should continue to translate into rising production.
OPEC June Monthly: The June report came out on June 10th. OPEC has its forecast for the year at 96.6Mb/d. In Q1/21 usage was 92.9Mb/d and they see this quarter having consumption of 95.3Mb/d. We concur with the consumption level for this quarter. Where we disagree is the demand forecast that OPEC has for Q3/21 at 98.2Mb/d. Our view is that this will likely come in at a lower level of 96.5-97.0Mb/d and that their projection of decline in world inventories of 1.5-2.0Mb/d will not occur. OPEC plans to raise production by 2.1Mb/d over the months of May, June and July which is more than needed to meet the seasonal summer demand increase. Once summer is over consumption is likely to back off by 1.0-1.5Mb/d during the fall shoulder season and increase inventories in storage.
For the month of May OPEC production rose by 390Kb/d to 25.5Mb/d. This compares to a pre-pandemic level of 29.4Mb/d in December 2019. The largest increases came from Saudi Arabia which raised production by 345Kb/d to 8.47Mb/d. The Saudi’s plan to raise production to 9.5Mb/d by the end of July (produced 9.67Mb/d in December 2019), then to 10.0Mb/d by year end 2021 and then to 10.5Mb/d in 2022. With demand not getting back to (pre-pandemic) levels of 100-101Mb/d, the increases in production by Saudi Arabia are clearly not needed.
Iran raised production by 42Kb/d as they found buyers for their discounted crude in China. Venezuela saw a rise of 45Kb/d to 531Kb/d. The difference in OPEC production of 25.5Mb/d last month and the December 2019 level of 29.4Mb/d or 3.9Mb/d is less than the demand destruction of over 5Mb/d over this time period. WTI in December of 2019 was US$64/b and now is at US$72/b. This does not make sense. Crude is overpriced due to speculative pressure and is not justified by the fundamentals. OECD Inventories according to the report were 102 days or 4.51Bb. This is down from 120 days in Q1/20 but is up from 93 days in pre-pandemic days.
This month OPEC will increase production by 700Kb/d, and then in July they plan to lift production by a further 840Kb/d. OPEC will hold its next meeting on July 1st to determine future production increases or decreases depending on what happens with the Iranian nuclear talks and the resulting increase in Iranian crude production from August onward.
Bearish pressure on crude prices:
- The new Covid variant ‘Delta” is spreading around the world and is replacing the prior B.1.1.7 variant. This version from India is now the most active in the UK and has been found in 60 countries including the US and Canada. The problem with this version is that one dose of the Covid vaccines is only 33% effective against the strain. One needs two shots of the Pfizer version to get to 88% protection. This variant is especially virulent for young people who have not been vaccinated. To date there have been 3.81M deaths worldwide of which the US has over 600K, more than have died in all the US’s foreign wars. The highest number of single day new cases is occurring now in Afghanistan, Bolivia, Colombia, UAE and Zambia.
- Iran is in the final stages of talks to return to the 2015 UN nuclear deal and if an accord is completed in the coming weeks, they could increase production quickly by 1.0- 2.0Mb/d to 4Mb/d, up from 2.46Mb/d produced in May 2021. Iran last produced over 4Mb/d in 2016. Iran has been working to be able to ramp up production quickly as it has a new 1,000Km – 1Mb/d pipeline that bypasses the Strait of Hormuz. It is situated at Jask, in the Gulf of Oman. It will make shipping crude cheaper to buyers in Asian countries. China and India are expected to be the biggest buyers of this new crude supply.
Bullish pressure on crude prices:
- Rising vaccination levels to herd immunity level of 70% by July in the US is expected to provide a return to normal summer holidaying and energy consumption. So is Canada and the EU.
- Weather impacts (hurricane season) should start soon in the Gulf of Mexico which would necessitate shutting in some of the offshore production.
- High temperatures and heat waves in Texas and California are cranking up demand for air conditioning and natural gas is a beneficiary of this increase in electricity demand. NYMEX natural gas prices have lifted to US$3.24/mcf.
- There has been a lift in crude prices in the last few weeks as some commentators have commented that the Iran deal may come much later than the August forecast as talks drag on, delaying the large increase in Iranian crude volumes.
CONCLUSION: We remain skeptical of the optimism about the projected 4-5Mb/d full recovery in energy demand to 100Mb/d before year-end (OPEC forecast 99.8Mb/d). The tug of war between the normal summer holiday travel demand pick-up and the 3-4Mb/d increase in crude oil supplies this year remains the key determinant of future energy consumption and crude oil prices. We see demand picking up by around 2Mb/d before year-end which is less than the amount of production that will be brought on by OPEC alone. Between some OPEC cheating and Iran adding 1-2Mb/d from August (if a deal is concluded), the additional product will be in excess of current demand and will build inventories. This would endanger the OPEC bullish scenario.
WTI crude oil prices rose above US$72/b (first since October 2018 – today US$72.36/b) and are now at a mania level. A decline below US$66/b should start the corrective phase we have been forecasting. The current enthusiasm by hedge fund futures traders and now MEME speculators for the sector, appears to be like that seen in late 2018 when crude oil prices rose to US$76.90/b in September and three months later had declined to US$42.36/b, down by 45%. The price of crude now is above the pre-pandemic price of early 2020, yet demand is 4-5Mb/d less and production is ramping up by 2.1Mb/d from OPEC alone. This does not make sense!
Energy Stock Market: The S&P/TSX Energy Index trades currently at 143. A close below 130 should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The expected general stock market weakness would be the catalyst for the energy sector to lose its current momentum and back off meaningfully.
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