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Oil surged early Wed on bullish API/EIA inventory report

calendar 02/09/2020 - 15:07 UTC

On early Wednesday, oil further jumped almost +1.05% to 43.21 on hopes of a bigger-than-expected draw in US crude stockpiles and hopes of a quicker economic recovery due to better-than-expected manufacturing PMI data from the U.S., China as-well-as India.

The API reported early Asian Wednesday a decline of -6.360 MB last week, compared to expectations for a draw of around -1.950 MB; prior drawdown -4.524 MB. Gasoline stocks also fell by -5.761 MB, more than analysts' estimates of a draw of around -3.0 MB. The API also estimated -0.237 MB drawdown for the crude oil stocks at Cushing (OK) and -1.424 MB in distillates stockpiles.

Oil was also boosted as U.S. Presidential opposition candidate Biden reiterated recently he will not ban fracking in the U.S. as being campaigned by his rival Trump: I am not banning fracking. Let me say that again. I am not banning fracking. No matter how many times Donald Trump lies about me.

Although not banning fracking in the U.S. will increase supplies of oil (higher production), it’s positive in the sense that oil capex will flow in, positive for oil. There is a concern that outside Russia and the Middle East, there is almost nil interest for oil capex amid OPEC+ politics, price volatility, and growing preference of alternative renewable/green energy. As per some estimates, the global oil demand may diminish as much as 60% by 2050 (from present normal demand of around 100 mbpd to 40 mbpd) amid the thrust on renewable energy/green stimulus. Biden is also eager for such a green stimulus if he wins the White House in Nov, while Trump is not supporting such massive green stimulus at the expense of jobs & employment.

On 31st Aug, the White House (Trump admin), in another deregulation move, issued a proposal that would make it easier to permit oil and gas drilling operations in national forests, aligning permitting processes between the Forest Service and the Bureau of Land Management. This is despite the concern of environmental groups as they say the move will sidestep environmental reviews.

But there is also a report that U.S. gasoline demand fading now. After the gasoline demand surged since bottoming out in April (corona lockdown peak), it’s now flattening out in the past two months below pre-COVID levels, indicating fragile economic recovery amid the resurgence of the coronavirus, mini-lockdowns, and scarring effect. So, we may see a 15% lost demand of oil from pre-pandemic levels until the invisible fire, the COVID-19, extinguish fully after vaccinations by H1-2021.

Over the years, since Trump came to the Oval Office in 2016, the U.S. is playing a vital role in oil-be it higher production, and Trumps’ bellicose policies (sanctions) on Iran and Venezuela, paving the way for higher U.S. exports (at the expense of Iranian and Venezuelan oil).

Trump admin may be also preparing more sanctions on Venezuela as-well-as Iran (re-imposition of earlier sanctions). Although, Abrams did not specify but hinted that the new sanctions would include eliminating exemptions offered to third parties buying Venezuelan oil. In a recent interview, Abrams, U.S. Special Representative for Venezuela said: We think our sanctions have been extremely effective in reducing income to the regime but we think we can make them more effective. So we are going to be doing some things to tighten up in the near future.

Bottom line:

The short term rally in oil may be over amid slower demand, especially subdued transportation demand and potential higher supplies from U.S., Mexico, Iran, Iraq, and Libya. The HIS Markit said in a recent note: Oil demand to the plateau below pre-pandemic levels. Global crude demand surged from May to July with the easing of some COVID-19 restrictions and now rests at 89% of prior-year levels--compared to being at 78% in April. IHS Markit expects demand growth to wane and plateau at 92-95 mbpd (or roughly 92-95% of prior-year levels) through the first quarter of 2021. The reason demand does not bounce back to pre-pandemic levels is because of reduced air travel.

On Wednesday, the Russian Energy Minister Novak also said the oil demand has recovered to approximately 90% of its pre-crisis (COVID-19 pandemic) levels. Novak noted that full recovery should be expected in 2021. Novak nevertheless warned that it may be dependent on the general economic recovery, the gradual elimination of lockdown measures, and also warned about certain risks. Novak also revealed that the total oil output in Russia is expected to fall to 510 MB for the entire 2020, a figure 10% lower than in the previous year, while the investments in the oil industry in Russia may decline to up to 20% compared to the annual average.

Technical view-Oil/WTI-Sep Exp:



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