The Energy Report 08/05/2020

Parabolic Party

The global commodity futures market is going on a parabolic – it’s going straight up like a rock that even Elon Musk would be proud of! – rampage, and now one wonders if the oil market is getting ready to join the party. Gold, silver, lumber, palladium, platinum cheese, and dairy and even natural gas have made – or are making – parabolic moves that will drive more money to the commodity sector.

The drive to futures is becoming more apparent as global fiscal and monetary policy, along with a quickly recovering worldwide manufacturing revival, is going to drive more money to the commodity sectors. Yet in comparison, despite the incredible comeback in the petroleum sector that has now seen Brent crude notching a five-month high, the move in petroleum seems somewhat restrained.

Part of that is the fact that after the crash in demand, the market had to work through a pretty big glut of supply. Yet more data suggests that that is happening. The Energy Information Administration (EIA), reported that the production of crude oil fell in the United States in May by 1.99 million barrels per day, the largest monthly decrease since at least January 1980 when they started keeping records. The American Petroleum Institute (API) reported another major drop in U.S. crude oil supply. The API reported that crude supply fell by 8.587 million barrels. It looks like those whispers about a major drop in supply where true. Yet a larger than expected 3.824-million-barrel increase in distillate supply dampened the bullish enthusiasm.

The API did suggest that gasoline demand is trying again to rise. Not only did they report a 1.748 drop in gasoline supply but also a suggestion that stalled gas demand may be risng again. John Kemp at Reuters says, “U.S. gasoline supplied to the domestic market, a proxy for motor fuel consumption, averaged 7.2 million b/d in May, down -24% compared with the same month a year earlier, but that was an improvement on just 5.8 million b/d in Apr, down -37% compared with the prior year.”

The Wall Street Journal reports that, “Tropical Storm Isaias has caused 2.5 million to lose electric power along the East Coast, but natural gas does not care. Natural gas broke out to the upside as better than expected LNG export demand caught the market by surprise along with forecasts for much hotter weather.

Andrew Weissman at EBW Analytics reports that, “a combination of bullish fundamental shifts—rising LNG demand, hotter weather, seeming declines in production—helped ignite a short-covering rally that sent the September natural gas contract skyrocketing 39.4¢ early this week. This mammoth price move equates to a re-pricing of the NYMEX futures curve, bringing prices more in line with strengthening long-term fundamentals. As the natural gas market digests this shift, a period of consolidation is likely near-term as longs take profits and shorts re-establish positions. Fundamentally, the move higher is entirely justified. Still-higher gas prices may lie ahead if forecasts for hot September weather verify, LNG strengthens, and production falls as the winter remains under-supplied. Any path higher, however, may be extremely volatile as the gas market attempts to bridge gaping calendar spreads with limited storage capacity.”

So gas has gone parabolic, when a few weeks ago that would have been almost unthinkable. Now with major moves happening in other commodities it might be just a matter of time before petroleum joins the parabolic party.

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