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Oil Prices Rally On COVID Optimism

Oil Prices Rally On COVID Optimism

Oil markets reacted bullishly to…

Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Jumping The Shark In A Sluggish Energy Market

To be honest, I had not heard of the phrase ‘Jumping The Shark‘ until recently (I’m not talking about surfer Mick Fanning either). It’s not like I didn’t watch ‘Happy Days’ when I was growing up, I just don’t remember that episode.

For those unaware, ‘Jumping The Shark‘ is a term used to describe a turning point in a show, a defining moment after which everything changes – and typically for the worse. The origin of the phrase comes from Fonzie water-skiing in a ‘Happy Days’ episode, and um, jumping a shark.

There are a number of current examples across energyland™ which exhibit the traits of said shark leap, so let’s jump right in.

First up is the key marriage of natural gas and coal in the US generation mix. Coal accounted for 50% of the generation mix as recently as 2009, but due to a number of key factors – essentially economics and EPA rulings – data just out show the two have crossed for the first time ever:

As natural gas prices remain mired around $3/MMBtu (h/t US shale boom), economics have spurred on significant coal-to-gas switching in the last year or so. This has coincided with the EPA’s Mercury and Air Toxics Standards (MATS) ruling, which has encouraged a large wave of coal plant retirements ahead of its implementation in April of this year. Related: Toxic Waste Sullies Solar’s Squeaky Clean Image

And while we will likely see an uptick in coal generation in the near-term as plants return from maintenance, the overarching theme for the power generation sector is that the coal industry has been leapfrogged by natural gas.

Next up, we look at retail gasoline prices. As we hit the peak of driving season, refineries are going full pelt to meet this elevated level of demand, as well as to take advantage of persistently strong refining margins.

Combine strong supply and ample inventories with a significant recent sell-off in oil, and retail gasoline prices have peaked out for the year, on a slippery slope towards $2/gallon.

While the last four years have seen retail prices peak as early as February (2013) and as late as May (2011), a July peak is unusual, and more a symptom of the strong crude oil rally from March lows through May. But as our wallets tell us, a July peak is better late than never. Related: Energy Stocks: Undervalued Or Value-Trap?

Annual highs on the national average, 2011 – 2015

It isn’t just gasoline that is seeing a turning point. Diesel is also seeing an historic hopscotch underway, as it drops below the retail price of gasoline for the first time since August 2009. This scenario is unlikely to hold for too long, however, as gasoline demand ebbs away while diesel demand ticks up toward the end of the year.

The next crossroads comes courtesy of Mexico, as a landmark decision to open up its oil industry to foreign investment for the first time in 77 years has given way to its first auction of oil assets last week. Unfortunately, the auction experienced more of a flop than a fanfare, as only 2 of the 14 blocks up for grabs received successful bids. This result was not wholly unexpected, however, given the relatively unattractive nature of the blocks involved. There is expected to be a much greater appetite for larger deep-water blocks in the coming auctions. Related: Forget Media Hype. Oil Set To Rebound

For a nation which sees its waterborne oil exports flat-lining around 1.2 mn barrels per day (see below) as its oil industry remains in structural decline, the prospect of oil production rising by ~40% over the next decade to 3.4 mn bpd (the government target) gives reason to place faith in this turnaround.

(source: ClipperData)

Finally, we close out with a sea change underway in nuclear generating capacity. While leading consumers such as the US and France see their nuclear capacity remaining mostly unchanged, a significant capacity leap in the coming years is being made by the behemoth of energy consumption, China. China is about to criss-cross over Japan, South Korea, and Russia next year to become the nation with the third largest capacity for nuclear generation in the world:

As it turns out, turning points are everywhere in energyland™ if you go fishing for them. Take heed…and watch out for the sharks.

By Matt Smith

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