Red hot oil prices cooled down after reports that OPEC Plus was prepared to “cool down the oil market with extra production.” The Bloomberg report caused oil prices to sell off into yesterday's close after recovering from the China bubble talk sell-off. Yet should the market have been surprised by that announcement? OPEC Plus not only expected to raise output but probably leaked that statement. It came by increasing pressure from India that has been complaining that the cartel has been driving oil prices higher. That is a role that the U.S. used to take yet the Biden Administration has been silent on OPEC Plus because they want higher prices. They want higher prices because it makes green energy more economical. Pressure from the Biden is causing talk and a major change in the outlook from the American Petroleum Institute that will further increase oil and gasoline prices.

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The Wall Street Journal reported that “The oil industry’s top lobbying group is preparing to endorse setting a price on carbon emissions in what would be the strongest signal, yet that oil and gas producers are ready to accept government efforts to confront climate change. The American Petroleum Institute, one of the most powerful trade associations in Washington, is poised to embrace putting a price on carbon emissions as a policy that would “lead to the most economic paths to achieve the ambitions of the Paris Agreement,” according to a draft statement reviewed by The Wall Street Journal. “API supports economy-wide carbon pricing as the primary government climate policy instrument to reduce CO2 emissions while helping keep energy affordable, instead of mandates or prescriptive regulatory action,” the draft statement says. API’s executive committee was slated to discuss the proposed statement this week. In a statement to the Journal, API’s senior vice president of communications, Megan Bolomen, said the group’s efforts “are focused on supporting a new U.S. contribution to the global Paris agreement.” If you cannot beat them join them but America better is ready to pay through the nose for oil and gas.

Reuters is reporting that the increase may not be a done deal even though I think it is. Reuters reports OPEC and allies, known as OPEC+, are considering rolling over oil production cuts from March into April instead of raising output because of fragile oil demand recovery due to persisting worries about the coronavirus, three OPEC+ sources told Reuters. OPEC+ ministers hold a full meeting on Thursday. The market had been widely expecting OPEC+ to ease production cuts, which have been the deepest ever, by around 0.5 million barrels per day (bpd) from April. 

Oil also got support from massive product draws reported from the American Petroleum Institute (API). The impact from the Texas power crisis that shut down refineries caused a 9.933-million-barrel drop in gasoline supply and an equally massive 9.053 million barrel drop in distillate supply. So even a 7.356 increase in crude supply looks small as refiners will have a lot of work to do to increase supply.

We think the worries about OPEC plus raising output is overblown. As we have said for months, the global oil market is headed into a long-term deficit situation. While an OPEC increase in production may cool prices in the short term, in the long term the die has been cast. Not only will the market be undersupplied in the latter part of the year as demand comes back as more vaccines are available, but the lack of oil investment will lead us to a supply gap that could leave the oil market tight for at least a decade. 

We are seeing woefully low investment in oil exploration and drilling in part because we are being told that we are headed towards peak demand. Yet the reality is that even under the best-case scenarios, oil demand will grow for the next 20 years. The problem is that the oil will not be there. Cheap oil anyway. That is why we have been warning for months to not take this market for granted. Hedgers hedge on breaks. Lately, we have been seeing market whipsaws on headlines. Dates should get more bullish as we go. If OPEC causes a price break to use it to add to long-term positions.

Iran reportedly is shopping around for oil buyers in a sign they may come to the table with the Biden administration. So, a win for Iran’s oil producers and a loss for U.S. producers.

It might be time to buy natural gas calls as well. Andrew Weissman of EBW Analytics says that the April natural gas contract has gained 6.8¢ early this week to recover one-third of last week’s losses. Technical support helped the rebound, but mid-March forecast uncertainty—with bearish numerical models pitted against analog patterns and a Madden Julian Oscillation suggestive of cold potential—may decide if the rally can continue beyond key resistance near $2.92/MMBtu. The longer-term seasonal outlook for natural gas remains resolutely bullish, with recent production, LNG, and economic projections—and planned LDC injections picking up steam in the back half of April—pointing to significant gains. Still, the next 30-45 days may favor range-bound trading on declining seasonal demand, a post-winter production bump, and heightened demand outages delay the realization of a vastly undersupplied market.