Hot Oil, Cold Weather, Uncle Sam’s Green

For a couple of weeks, the $600 payments from Uncle Sam seemed to have found their way into the tanks of Americans driving their automobiles a little bit more than they had. According to the US Energy Information Administration (EIA), the total amount of gasoline “supplied” by the domestic marketplace reached 8.4 mbpd the second week of February. Like retail sales, pretty compelling correlation to that last dose of fiscal-ity written out of Treasury the end of last year.

The latest weekly number dropped considerably. Undoubtedly weather-related, the question is how much effect from the temporarily frozen middle sections of the country.

The good news, such that it can be classified that way these days, is that this Polar Vortex tornado shut down a good piece of domestic energy production, too – preserving the basic elements of what is driving crude oil prices vertical. This supply squeeze continues unabated, increased by what happened in Texas, as producers have held down production even as WTI resurrected like the mythical phoenix. They have yet to signal any rush to ramp back up, perhaps spoiling the blackened bird’s ascent. 

What that means is clear extrapolation; so long as production remains incredibly suppressed, the oil market overall can continue to – at best – modestly rebalance. It hasn’t quite yet, still future tense; the end of COVID is being projected alongside some semblance of normality in the real economy.

There is some basis for thinking this way, and not just “stimulus” faith. Crude oil stocks have come down during what would otherwise have been a normal period of seasonal accumulation. From record levels despite huge production cuts, to near record levels and suppressed production for as long as foreseeable.

Gasoline is still a problem, though, especially given indicated demand even when picking up in January and early February.

Growing backwardation (incentivizing use rather than storage) at the front of the WTI curve indicates that the market isn’t too concerned with these radically more positive forward projections of physical balancing – even if they are only scheduled for forward arrival.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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