Energy pulls back from 9-month highs, still bullish

Update for Dec 14: In a typical over-reaction, crude futures wiped out sold early gains on vaccine optimism after OPEC's latest Monthly Oil Market Report cut its forecast for 1Q 2021 demand by 1M bpd. WTI futures fell from a high of $47.37 to $476.25 as of 9:45 am CST. OPEC sees global oil demand at 93.97M bpd in the first three months of next year, down from 94.95M bpd. For all of 2021, OPEC cut its demand 360K bpd. That would be up 6.25M bpd from 2020, or nearly 7%.

Oil prices on Dec 11 posted moderate losses as crude prices fell back from Thursday's 9-month highs and gasoline prices slid from a 3-1/2 month high. Energy on Friday was undercut by a stronger dollar, weaker stocks, and less optimism about a pandemic aid package from Congress. Also, no-deal Brexit concerns and rising Covid infections may curb economic growth and are also bearish for energy demand, according to Barchart.com.

However, long-term, I still see a bullish trend in energy and maintain my positions such as FENY, IEZ,  and AMLP.

Friday's global economic data was supportive of energy demand and crude prices. The University of Michigan U.S. Dec consumer sentiment unexpectedly rose +4.5 to 81.4, stronger than expectations of -0.9 to 76.0. Also, Italy Oct industrial production rose +1.3% m/m, stronger than expectations of +1.0% m/m.

Reduced chances for a U.S. pandemic aid bill weighed on stock prices Friday and was negative for fuel demand prospects. Bipartisan talks on a $908 billion pandemic relief package have stalled and are hung up on differences over shielding companies from Covid-related lawsuits.

An increase in miles driven on U.S. highways shows improvement in fuel demand and is supportive for crude prices. The Department of Transportation on Friday said that vehicle miles traveled on U.S. highways in the week ended December 6 rose +5% w/w to 14.3 billion miles.

Signs of stronger global energy demand are bullish for crude after India's state-run Indian Oil Co. on Thursday said that refinery utilization in all of its refineries rose to 100% in November from 88% in October, a sign of stronger fuel demand in India, the world's third-largest crude consumer. Also, U.K. government data on Thursday showed weekly road fuel sales by filling stations in the U.K. were 15,070 liters per filling station in the week ending December 6, up +8.7% w/w.

Data from Baker Hughes on Friday showed that active U.S. oil rigs rose by +12 rigs in the week ended December 11 to a 7-month high of 258 rigs, well above August's 15-year low of 172 rigs. Also, Baker Hughes reported on November 6 that the number of global active oil rigs in Oct fell to a record low of 1,016 rigs (data since 1975).

Wednesday's weekly EIA data showed that (1) U.S. crude oil inventories as of December 4 were +10.7% above the seasonal 5-year average, (2) gasoline inventories were +4.6% above the 5-year average, and (3) distillate inventories were +10.8% above the 5-year average. U.S. crude oil production in the week ended December 4 was unch w/w at 11.1 million bpd but down by -2.0 million bpd (-15.3%) from February's record-high of 13.1 million bpd.

Big Picture Crude Oil Market Factors: Bearish factors include (1) the major damage done to global energy demand by the Covid pandemic, (2) the large global oil surplus despite the OPEC+ production cut that took effect on May 1, (3) the OPEC+ agreement to taper its crude production cuts to 7.7 million barrels/day starting in August from 9.6 million bpd in July, (4) high U.S. crude oil inventories that stand +10.7% above the seasonal 5-year average, (5) high gasoline inventories that stand +4.6% above the 5-year average, (6) high distillate inventories that stand +10.8% above the 5-year average, and (7) cessation of hostilities in Libya that has allowed Libyan crude production to increase to over 1.25 million bpd.

Bullish factors include (1) the OPEC+ production cut agreement of 7.7 million bpd starting in August, although that was less than 9.6-9.7 million bpd during May-July, (2) the decline in U.S. and global oil production that is being forced by negative market conditions, (3) the slump in active global oil rigs in October to 1,016 rigs, the fewest since the data began in 1975, which will lead to lower global crude output, (4) China's increased purchases of U.S. oil as it seeks to meet January's U.S./China phase-one trade deal that called for China to boost its purchases of U.S. energy products by $52 billion over the next two years, and (5) the sharp drop in Iranian oil production due to U.S. sanctions and in Venezuelan oil production due to U.S. sanctions and domestic turmoil.