A pretty quiet week for the energy markets, with Wall Street Bets dominating the news cycle. That said, there are several notable items.
CHART OF THE WEEK COMES VIA CRESCAT CAPITAL
COMMODITIES TO EQUITIES RATIO
This chart suggests that we are at the start of a multi year commodities boom cycle
TECHNICALS
I noted last week that we would probably continue sideways/consolidation for this week. That is exactly what we saw. Should we follow seasonal tendencies and if we see a bigger pullback in the broader markets, we may see crude slightly pullback at the beginning of February before a continuation of the trend higher. China mobility data is showing some weakness due to recent Covid outbreaks, and COT suggests that some money managers are taking some profits here. So caution over the next couple of weeks. Overall this chart is still bullish.
5/10/15 YEAR SEASONAL CHART
FUNDAMENTALS
US: On Thursday I went over the new Biden administration’s plan to extend the 60-day freeze of new permits and leases in federal lands by Executive Order to “indefinitely” to “help restore balance on public lands and waters”. The order will direct the Department of the Interior to pause new oil and natural gas leasing on public lands and offshore waters, concurrent with a comprehensive review of the federal oil and gas program. This is NOT a ban, but rather a “review” of policy. On Thursday however, it was revealed that the Biden administration has issued at least 31 new drilling permits authorizing operations on federal land and coastal waters, despite an order to freeze such activities. This number is now up to 42.
So far, it does not look like there is any reason to panic. Again, should this become permanent, it would be bullish longer term. In the short term, it could be less bullish if oil companies try and pump as much as they can out of existing leases, as they will not be able to renew them. I am keeping a close eye in this.
PARIS ACCORD: An additional note on rejoining the Paris accord, Paul Goydan, Houston-based head of the North American energy practice with Boston Consulting Group points out that:
“Re-joining Paris just commits the U.S. to reduce GHG emissions in line with keeping global warming to “well below 2 degrees.” In practice, it will require the U.S. to submit a Nationally Determined Contribution, which is effectively a plan for how the U.S. will achieve net-zero emissions. So, other than achieving net-zero emissions by 2050 and setting interim targets, there are no particular constraints on what the U.S. can do to achieve it. And there are no specific penalties. So it’s all up to what the Biden administration does and what passes Congress.”
“We expect more stringent federal regulation where feasible – first targets will be on methane emissions and flaring, while subsequent measures will be focused on CAFE (Corporate Average Fuel Economy) standards, power markets. But a comprehensive new regulatory or market-based regime for the climate is unlikely; with congressional action challenged, the Biden Environmental Protection Agency will attempt to use the Clean Air Act but the legal basis will be heavily litigated. Overall, potentially the biggest impact will be through new government spending and incentives shifting energy production and consumption patterns – there is now an emerging bipartisan consensus on expanding support for a full range of technologies that will fundamentally impact oil and gas demand (e.g., electric vehicle promotion, renewables adoption, electrification).”
In sum, there will be a lot of push back and legal challenges to many of these agendas. Change will be slow and arduous.
US OIL MARKET: US oil market is on track to rebalance around mid-2020. U.S. petroleum inventories have continued to converge down towards the five-year average, a sign that oil market rebalancing remains on track, despite the resurgence of the coronavirus since the end of 2020.
US RIG COUNTS: US rig counts are rising, but there are about 250 horizontal rigs at work in US and industry requires 350 just to keep output flat. Again, I do not believe we see 2019 high production output again .
Crescat Capital points out that rig count cyclicality has been an incredibly reliable contrarian forward-looking indicator for oil prices. Prior historical dips also preceded key market bottoms in WTI prices and oil and gas stocks.
US TRAVELER THROUGHPUT
Airline traffic continues to be the laggard. This continues to be the big drag on jet fuel demand.
US NATURAL GAS: Week of February 7-13 cold front moving into most of the country. We will likely see a surge in natural gas usage.
I am still long 16 April 2021 UNG calls.
CANADA: Now that Keystone XL is effectively canceled. TransMountain will become increasingly more important. Trans Mountain Corp, a government corporation, is spending C$12.6 billion ($9.9 billion) to nearly triple capacity to 890,000 barrels bpd, a 14% increase from current total Canadian capacity.
Prime Minister Justin Trudeau’s government bought the 68-year-old pipeline in 2018 when previous owner Kinder Morgan faced legal hurdles to expand the 1,150-kilometre (715-mile) line running from Alberta to the British Columbia coast. Trans Mountain has completed 22% of the expansion project, called TMX, which is scheduled for service in December 2022. Suncor Energy Inc, Canadian Natural Resources Ltd and BP PLC are among the committed shippers who have secured 80% of its additional capacity long-term. This pipeline expansion has not been without problems, there have been many protests, and lawsuits as approval has been needed from 139 First Nations Groups, along with British Columbia that has been adamantly against the project. That said, its completion will open up the Asian market for Canada, that has been largely dependent on the US.
*ACTIONABLE TRADE IDEA: Long Suncor (SU) and/or Long Canadian Natural Resources (CNQ)
Either on NYSE or TSX
OIL MAJORS CAPEX: I have talked about the fact that global CAPEX cuts in the oil industry will lead lead to en energy supply crisis.
OIL MAJORS CAPEX IS THE LOWEST IN MORE THAN 10 YEARS
SAUDI ARABIA: Rig counts continue to decline, if there were any doubt that they did not intend to keep up their end of the OPEC bargain, this should quell the naysayers.
CHINA: China has seen a resurgence of Covid-19 cases. China recorded more than 2,000 new domestic cases of COVID-19 in January, the highest monthly total since the tail end of the initial outbreak in Wuhan in March of last year. Most of the new cases have been in three northern provinces. Hardest-hit Hebei province, which borders Beijing, has reported more than 900 cases. Beijing, the Chinese capital, has itself had 45 cases this month.
The numbers, while low compared to many other countries, have prompted officials to tighten restrictions and strongly discourage people from traveling during the Lunar New Year, a major holiday when people typically return home for family reunions. -AP
China oil demand ended 2020 on a high note. Energy Intelligence calculates that China’s apparent oil demand rose by 3.45% last year to 13.3 million barrels per day. I will monitoring China carefully over the next few weeks to see the mobility impact of these recent restrictions, already we are starting to see the impact.
Side note this could be a catalyst for the(seasonal) pullback in oil that we generally see the first couple weeks in February
CHINA MOBILITY DATA LAST 7 DAYS is showing signs of slowdown in the three areas that are experiencing new restrictions
BEIJING
SHENZHEN
GUANGZHOU
CFTC COMMITMENT OF TRADERS
COT on commodities in wk to Jan 26 saw specs lift bullish bets by 4% to a record 2.6m lots valued at $133bn. All sectors except softs saw net buying led by cattle, Brent crude oil, soybean oil, corn and gold while selling were concentrated in WTI crude oil and sugar.
GLOBAL CRUDE OIL INVENTORIES
CHART OF THE DAY-FLOATING STORAGE
Global crude oil floating storage last week fell to its lowest since early April, sitting now ~15m barrels above pre-pandemic levels. With crude oil inventories coming off investors pilling up at the front of the curve, backwardation is steadily widening up. Brent M1-M2 spread rose to +20¢ per barrel earlier today, the widest since March 2020. And Brent Dec-Red-Dec is again >$2 per barrel. This is very bullish medium term.
Global weekly inventory for week ending January 22 saw an -11M draw. Products and crude drew about equally. US offset by big EU builds (may last as COVID continues rampage there). Elsewhere down
FUJAIRAH OIL INVENTORIES
Oil product stockpiles at the Fujairah port dropped to an eight-week low, led by a slump in heavy distillates as exports of fuel oil soared.
The total inventory stood at 21.759 million barrels as of Jan. 25, down 1.8% from a week ago and the lowest since Nov. 30, 2020, according to Jan. 27 data from the Fujairah Oil Industry Zone at the Fujairah port on the UAE’s east coast.
Heavy distillates including fuel oil and marine bunkers tumbled 12% to 9.995 million barrels, also the lowest since Nov. 30.
Fuel oil exports from Fujairah soared to 4.046 million barrels in the week of Jan. 18, the most since September 2019, according to data analytics firm Kpler. Most of the shipment, almost 3 million barrels, is bound for Asia-Pacific, including Singapore and South Korea. – Platts
Again an outstanding report with light, middle, and heavy distillates all drawing.
EIA
Crude oilstocks are now firmly back into the 5 year average.
Gasoline stocks had another build this week, but we generally see higher lstocks this time of year, and we are still well within the 5 year average.
Distillate stocks pulled back a bit, we are still on the high end of the five years average, but like gasoline stocks tend to be higher this time of year.
What can I say…these propane draws are incredible, we are at the bottom of the 5 year average. Domestic demand continues to be incredible strong, with California restaurants re-opening outdoor dining, we could see a lot of pent up demand in this market.
DAILY SENTIMENT INDEX (DSI) HEADING INTO THIS WEEK