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Monday, August 2, 2021

The Energy Report: Hurt Like Hell

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Short oil traders beware because you live in La La Land, and if you think that being short oil is ok, then go ahead and make my day. If you dare bet against the long side of oil, you are going to be hurting like hell! Ok, it is not me saying that even though I believe that peak oil demand is nonsense and I believe that the lack of investment in traditional forms of oil and gas will come back to bite us one day. No, the person saying this is non-other than the Prince of OPEC, Abdulaziz bin Salman.

I know that the Prince is the Prince of Saudi Arabia, but he is the world’s most influential oil minister that brought the global oil market to its knees by instigating an oil production war that caused oil to trade well below zero for a short time. He also was part of the most massive global oil production cut in history that has brought oil prices back-up to more respectable levels. Now he is warning short traders of the worldwide oil market the same way a CEO of a tech company warns short-sellers. If you short oil beware!

I don’t know if they cut 7 million barrels a day or eight million barrels a day but seeing that Saudi Arabia is OPEC’s largest producer, and had the power to drive oil below zero and up again, the question you have to ask is, do you feel lucky? Well, do you, punk?

If you look at oil, it seems that the Labor Day September swoon is over, and the market is again focused on the path to a balanced global oil market. Saudi Arabia’s threat to shorts also came with a carrot and a stick to overproducing OPEC members. By dropping hints that if they get in line with production cuts and makeup for past overproduction sins, that Saudi Arabia might shock and awe the oil market with a surprise production cut. There is no doubt that the Saudis caused a price spike with a surprise, but all you have to do is look at the success they have had reducing U.S. oil inventories in the U.S. It seems the Saudis might be getting ready for a production cut of supply.

I think the Saudis are also looking at the big picture. While major oil companies fret about a potential peak or end of global oil demand or the green energy new deal, the reality is that oil and gas are going to be a significant part of the energy mix for most of our lifetimes and well beyond. The lack of investment in longer-term projects means that we will get to a point where it will meet demand. Capital spending cuts by oil majors are well over 30 billion dollars, and small shale operators have gone bankrupt. Millions of barrels a day of future energy production will not be there when the world demands it. In the meantime, low prices for oil and natural gas in the short term will create longer-term demand commitments from companies and technologies that can’t pass up a great deal.

RBOB gasoline took a lead roll in recovery and should stay bullish over the next few months. Diesel is still an issue. As we said, the September swoon could have set low prices for years, assuming we don’t have a stock market crash or more shutdowns due to Covid.

Natural gas got whacked as supplies surged on storm weakened demand and a drop in exports. The EIA report came in very bearish with working gas in storage at 3,614 Bcf as of Friday, September 11, 2020, according to EIA estimates. This represents a net increase of 89 Bcf from the previous week. Stocks were 535 Bcf higher than last year at this time and 421 Bcf above the five-year average of 3,193 Bcf. At 3,614 Bcf, total working gas is above the five-year historical range.

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