Can the oil market save the world? Well, maybe not, but perhaps it can save the global stock markets. The breakdown in the broken-down oil market on Wednesday was a precursor to the breakdown in global stock markets. Oil went first, and stocks followed, then oil tried to rebound, and oil as a leading indicator would suggest that stocks should bounce back. Yet the reality is that stocks needed to break after it a historic run led by tech stocks. The pre-holiday profit-taking was welcome and very much needed. Someone had to take a bite out of Apple (AAPL), and Tesla (TSLA) had its worst week since March. As the Techs dropped, energy stocks tried to creep back.  Exxon (XOM), Chevron (CVX), Occidental (OXY), ConocoPhillips (COP), Shell (RDS-A), and BP (BP) may be a beneficiary if traders start to look for sector rotation or at least a hedge from the high flying FAANGS.

Energy stocks will also benefit as President Trump’s polls are rising. Remember, Vice President Biden was going to ban fracking and eliminate fossil fuels. Of course, that was before he was for fracking and fossil fuels. Yet he is kind of for or against it as he is kind of for and against the New Green Energy deal. It’s complicated, okay. Let’s just say the Vice president Biden stand firmly for fracking or not.  

The dollar freefall seemed to end, and that started oils price breakdown. The stumble and the rebound in the dollar helped break the oil price oil, but the dollar recovery may be short-lived. And while refiners go into maintenance, there are rising concerns that we will see a tightening of gasoline supply and rising pump prices.

Part of the problem for gasoline is a glut of distillates. As reported by Reuters - U.S. refiners are stuck between meeting rising gasoline demand and the glut of supply in the lackluster diesel and jet fuel markets. Refiners cannot produce gasoline without making other products like diesel, commonly known as distillates. The coronavirus pandemic slashed demand by one-third worldwide, and so far, the gasoline use has rebounded faster than that of distillates. Refiners still have big stockpiles of diesel and other fuels and do not want to make more of those products due to poor margins.

Refiners have been running at around 80% utilization since the end of July, up from the spring, when the pandemic broke out, but still below usual levels. With summer driving season-ending, they are reluctant to boost output for the winter season, when gasoline demand declines.

Yet the risk is that gasoline demand may exceed expectations because we are coming from a lower bar. Gasoline demand should continue to rise despite the drop because of Hurricane Laura. If Congress gets together on another relief package, gasoline demand should spike. The odds are strong that we will see gasoline inventories tighten significantly in the coming weeks. Less, of course, the break we get as we say goodbye to the Summer Blends.

Oil inventories will tighten as well. I think many are going to find that even without the impact of Hurricane Laura, oil inventories would have fallen. While many are looking for a quick rebound in crude supply, I doubt that that is going to happen. So, unless stocks get really hammered next week, oil prices should recover somewhat next week. Still, a significant rebound may not occur until late September when we see some refiners start to come back online. Besides, the drop in the OPEC crude basket should scare OPEC into continued compliance with its historic production cut.

 Russian Oil Minister Alex Novak said that Russia estimates global oil demand destruction at 9 to 10 million barrels of oil a day.

Reuters reports that Canada’s main crude-producing province, Alberta looks to use hydrogen to fuel the expansion of its oil sands without increasing emissions, even as Prime Minister Justin Trudeau promises decisive action against climate change, officials with the two governments said.  Alberta will announce no later than October a strategy to develop “blue hydrogen” as a cleaner alternative to using natural gas to extract crude at steam-driven oil sands sites, Associate Minister of Natural Gas Dale Nally told Reuters in an interview. Deploying cleaner feedstock will allow Alberta to produce more oil without exceeding its 100 megatonnes annual limit on provincial carbon emissions, Nally said. Hydrogen will allow us to continue to move the bar and reduce the carbon intensity of the oil sands until you get to a point where there is no difference in (greenhouse gases) in conventional oil and oil sands,” he said, adding that Alberta’s hydrogen plan is synchronized with Ottawa’s. Reducing the carbon intensity of the oil sands would allow of course more expansion.” Blue hydrogen is produced from natural gas, with the carbon byproduct captured and stored.

Natural gas is trying a comeback as the fundamentals in the long term look more bullish. In a short time, weather forecasts that shifted t0 warmer means we get to run our air conditioners for a few more weeks. 

 Have a safe and happy Labor Day. God Bless America!