Oil takes a dive

Traders lose grip on wall of worry as strong dollar greases price slide

Steve Sutherlin

Petroleum News

Alaska North Slope crude took a drubbing Aug. 18, falling $1.43 to close at $67.53 per barrel. West Texas Intermediate dropped $1.13 to close at $65.46, and Brent fell 80 cents to close at $68.23.

A one-day 2% loss for ANS is tough news for Alaska’s government, which would benefit from higher prices to balance its budget. Unfortunately, the day’s red ink was not an isolated incident - it was the fifth down day in a row. The last time oil fell for more than three days running was in March.

WTI and Brent closed lower for the same five days, and both continued lower in early Aug. 19 trading, as Petroleum News went to press. WTI fell below its critical mid-to-late-summer $65 support level, trading as low as $63.13. Brent slipped below its own $67 support level.

“A move below $65 in WTI … could see prices drop back into Q2 trading ranges between $57 and $65,” Craig Erlam, senior market analyst at OANDA Europe said in a note, as reported Aug. 19 by Reuters. “This would be quite a drop from the levels we’ve seen the last couple of months and surely reflect growing concerns about the spread of delta and the implications for fourth quarter growth,” he said.

The worries over the delta variant of COVID-19 are nothing new at this point, but the price action this week is markedly more bearish, breaking a recent pattern of black Mondays followed by a price recovery at midweek.

ANS, for instance, closed at $71.60 per barrel Aug. 11, up from a $69.52 close on Aug 9 and just a penny away from its Aug. 5 close of $71.61.

The U.S. dollar has greased the oil price slide, extending its recent gains to hit 4-1/2-month highs in midday trading Aug. 18 before losing steam later in the day as last month’s Federal Reserve meeting notes were released. The Fed gave little in the way of certainty about a precise schedule for tapering of its asset purchases under its quantitative easing program.

For now, the Fed will continue with $120 billion a month of bond purchases. The total includes $40 billion of mortgage-backed securities. With a hyper-hot housing market in the United States, those are likely to be the first buys to be tapered sometime later in the year.

Continued Fed excess may not trim the dollar’s sails for long. As the delta variant wreaks havoc on Asia, lockdowns and travel restrictions there have made the U.S. markets look inviting in comparison. Foreign investors are flocking to the relative safety and liquidity of U.S. assets.

Money is likely to continue its flow into the U.S. dollar, and as that continues, oil will be more expensive for buyers holding foreign currencies.

Driving oil demand

U.S. oil inventories, however, fell to the lowest levels since January 2020, dropping 3.2 million barrels to 435.5 million barrels, the EIA said.

The dichotomy may suggest that the overall U.S. recovery is still underway, but that automobile fuel demand may be - for now - ceding its leadership position in driving nation’s the oil price recovery.

But automobiles are and for many years will be largely reliant on fossil fuels, according to Michael Cembalest, JP Morgan Asset Management chairman of market and investment strategy.

“World demand for liquid fuels should continue to rebound as COVID vaccinations increase and economies reopen,” Cembalest said in JP Morgan’s 2021 Energy Paper. “As demand grows, we expect supply to recover more slowly.”

Greater capital investment will be needed.

“While publicly traded oil companies only represent 2/3 of global production, their trends are notable: 60% decline in reserve lives since 2014, steepening oil cost curves since 2017 and declining capital commitments,” he said.

Cembalest said President Biden’s greenhouse gas emissions target of a 50% decline by 2030 vs a 2005 baseline is “very ambitious,” implying a decarbonization pace over the next 10 years which is four times faster than in the last 15 years.

“Even with the amount of money the administration plans to dedicate to the task, it’s an enormous hurdle,” he said.

The aggregate impact of nuclear, hydroelectric, and solar/wind generation reduced global reliance on fossil fuels from approximately 95% of primary energy in 1975 to some 85% in 2020, Cembalest said.

“In other words, energy transitions take a long time and lots of money.”

In 2021, renewables are expected to garner more capital spending than upstream oil and gas, yet the International Energy Agency projects that 70%-75% of global primary energy consumption may be powered by fossil fuels in the year 2040, he said. However, renewable energy is mainly used to generate electricity, and electricity as a share of final energy consumption on a global basis is just 18%.

“In other words, direct use of fossil fuels is still the primary mover in the modern world, as the demise of fossil fuels continues to be prematurely declared by energy futurists,” Cembalest said.