The Phil Flynn Energy Report
The reopening trade in the U.S. and around the globe has Brent Crude within a hair of $70.00 per barrel as the supply side for oil will start to get tighter. Not only did the American Petroleum Institute (API) report a 7.688-million-barrel crude draw, but 5.308-million-barrel gasoline draw as the gasoline demand heats up. In addition, there was a 3.453-million-barrel distillate draw as farmers get back in the fields and as airlines see the most flights since the pandemic shutdown.
U.S. refinery capacity is lower, as well. This comes against a backdrop of rising geopolitical risk to supply; reports say that a group of Iraqi militants attacked an oil field in Kirkuk and that Iran is ready to walk away from nuclear talks unless the Biden administration immediately removes all sanctions on the nation.
The crude oil market seems to have lost its fear of Covid-19 flare-ups in India and is instead starting to fathom the possibility of the market being undersupplied as the U.S. economy emerges from the Covid-19 slow down much faster than was thought possible. Even Treasury Secretary Janet Yellen seemed to acknowledge that strength would cause the Fed to have to raise rates at some point, and the stock market sunk as Treasury Secretary Yellen stated the obvious.
Yet with stimulus still pouring into the system and because most weren’t prepared for the power that fiscal and monetary stimulus would have, supply chain shortages are adding to commodity price inflation. For oil, it seems that demand is going to continue to surprise to the upside and up the strain. Downstream, the market will be stressed as they’re having issues with logistics, as well as finding labor.
It’s also getting harder to find capital as banks and pension funds are striving to be greener, wanting no sign of oil in their portfolio. This move is going to create a growing risk to the U.S. economy, as the Biden administration’s plans to transition from oil won’t be possible without natural gas and a big investment in nuclear power.
The efficiency of the government will decrease as they switch to electric vehicles, and the Biden administration will have to find a way to deal with the environmental impacts from a big surge in electric cars. Of course, nations that produce rare minerals will be the biggest beneficiaries of the Biden electric push. China will be a major benefactor, as their rare earth minerals are going to be needed.
In the meantime, we still need a lot of gasoline. Supplies are below normal, and demand may approach normal levels. Refining capacity is lower and we have a wave of pent-up demand. Widely-reported distribution issues due to driver shortages are disputed by many drivers— they say solving the driver shortage is easy: pay them. Still, there are certification issues, and companies putting more personal lawsuit risk on drivers is also a point of contention.
I’ve been saying it for months: the risks to prices are on the upside. Get hedged.
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