Energy Report: The Happy Place

Markets look like they are in a happy place as stocks look like they are poised for an end of year melt-up. The happy mood could even support oil, that while still in an uptrend, has been reluctant to breakout higher as covid demand destruction concerns are still a worry. That worry seems a bit detached from stocks that are pricing in the culmination of record-low interest rates and record-high stimulus and unless there is some devastating headline, looks poised to drive off into the sunset of 2020 to a soundtrack of record high after record high.


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Even oil, that may be worried that Russia may want to add more oil to the market in February, is getting caught off guard in the year-end Santa rally joy. Russia’s deputy prime minister and former oil minister Alexander Novak says although world oil demand will continue to recover next year, the recovery will likely fall just short of a full return to pre-pandemic levels in 2021. Yet even that is pretty amazing and what is more amazing is how global inventories have come down before we even had a vaccine because of OPEC Plus discipline as well as a drop in US output and now recovering oil demand in Asia. 

Money managers are getting into the spirit as they increased their net-long positions in WTI crude oil futures and options by 6,067 contracts to 336,645 in the week ending December 22 - a 19-week high. Long-only positions increased by  3,333 contracts and short-only positions fell by 2,73.

Oil products are also looking solid. Gasoline demand is showing signs of recovery in the U.S. and China, they are already driving like the covid nightmare never happened. For diesel, the global glut is easing and hopes for more air travel next year are giving us some support. Oil and products are also pricing in the President Joe Biden regulation premium that will mean higher prices in the next four years. Big write-downs by oil companies and the lack of investment and the silly predictions about “peak oil demand” will help create the environment for an oil price super cycle.

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