Energy Report: Not So Smooth

The crude oil bull market was a not so smooth transition from the COVID-19 inspired demand crash. Now with President Trump promising a smooth transition, to President-Elect Joe Biden the oil trade knows that policies are coming that will make oil prices higher. Brent crude hit $55.00 for the first time since last February, a time before COVID 19 became a household word. The drive back to that COVID price recovery has been driven by producer restraint as well as improving demand, not to mention forced austerity by oil producers that had to cut capital spending by over 100 billion dollars. Those cuts more than likely went too far and taking millions of barrels of future oil production off-line at a time that, despite all of the green energy investment, will still be needed. 

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Those oil cuts are being felt already in the U.S. shale patch and are one of the reasons that US oil production is down by 2 to 3 million barrels of oil a day. Despite the skepticism that OPEC plus Russia could put aside their differences and work tighter to reduce global supply, the success of the cuts is now clear. What is also clear is that it is a lot easier to cooperate when your back is against an economic wall and disaster is all around.

Oil demand is still surging in China and other parts of Asia and there are more signs that already global supplies are getting squeezed. Javier Blas of Bloomberg tweeted that, “After Saudi Arabia surprised the market with an output cut, traders bought **seven** benchmark North Sea cargoes on the Platts window yesterday — that’s likely a record number for a single day, signaling a tightening market. Unipec was the largest buyer."

Now the oil market will get even more support in the short term as commodity funds start to rebalance. The annual re-balancing of these funds begins today will last for five days leading to more buying for oil. Bloomberg News reports tens of billions of dollars’ worth of commodity investments are about to be switched around in a move that is set to cause a wave of oil-futures buying. Tens of billions of dollars worth of commodity investments are about to be switched around in a move that is set to cause a wave of oil-futures buying. While the move happens every year, crude is a 20% decline in 2020 means that the value of oil index investments has been far below its target for months. As a result, as much as $9 billion of oil contracts could be purchased over the five days of re-balancing that start Friday, according to Citigroup Inc., at a time when the market has already surged to 10-month highs.

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