Dark Days Ahead
President's words matter. Oil prices are falling as President Joe Biden warns of dark days ahead. The President said that, “Let me be very clear, things are going to continue to get worse before they get better.” Biden said at the White House, a warning the death toll from covid 19 will exceed 500,000 in next month. "We didn't get into this mess overnight, and it is going to take months for us to turn things around. But let me be equally clear, we will get through this. We will defeat this pandemic." Yet in the short term, the dour outlook is shaking investor confidence. Despite a slew of executive orders, there is still doubt that the Biden can get massive Covid 19 relief passed.
The covid 19 fears are impacting markets overseas. China was ahead of the US in containing the virus may be getting another wave of it. The AP reported that Shanghai imposed lockdowns on two of China’s best-known hospitals after they were linked to new coronavirus cases. Outpatient services have been suspended at Fudan University Shanghai Cancer Center and Renji Hospital. They have been cordoned off, along with some surrounding residential communities. After months of quelling small clusters with mass testing, isolation, and social distancing, China has seen outbreaks grow this winter, mainly in its frigid north. The National Health Commission on Friday announced 103 new cases had been detected over the past 24 hours.
The European Centre for Disease Prevention and Control (ECDC) today raised the risk of spread of new SARS-CoV-2 variants to very high, as COVID-19 activity in the United Kingdom, where the B117 variant is dominant, keeps a tight hold despite the country's third lockdown.
The markets are also getting more concerned that some of Biden's executive orders are going to slow economic growth. We know that on the energy side we are already pricing in contraction and that will translate to lower GDP growth from the energy sector. The killing of the Keystone pipeline has killed thousands of jobs and now the Biden administration has suspended new leasing for fossil fuel production on federal lands and waters, as well as the issuance of new drilling permits for sixty days that will also cause a freeze in investment and the loss of more energy jobs.
The industry has already lived through one of the most challenging years in history. The Houston Chronicle reported that, “more than 100 oil and gas companies declared bankruptcy in 2020 after the coronavirus pandemic plunged the energy sector into the worst downturn in a generation. Forty-six exploration and production companies and 61 oil-field service companies filed for Chapter 11 bankruptcy last year, according to Haynes and Boone, a Dallas-based law firm tracking bankruptcies. The 107 oil and gas bankruptcies in 2020 were the most since 142 bankruptcies were filed during the last oil bust in 2016.
Now with the Biden administration putting more pressure on the industry, we will more than likely see more bankruptcies and job losses. That will also mean in the long run much higher energy prices even as prices fall in the short term on covid 19 concerns.
The Biden administration is already having an impact on global oil production. Iran is ramping up oil output as it sees they expect the Biden administration will lift sanctions on the Regime. Biden seems to be moving towards reducing oil production in the US and allowing Iran to pick up the slack taking jobs and money from the US and potentially sending that cash to Iran. Bloomberg News reports that, “Iran has started ramping up its oil production and expects to reach pre-sanctions levels in one to two months, said Deputy Oil Minister Amir Hossein Zamaninia. The oil market will be able to accommodate Iran’s maximum oil output of around 3.9 million to 4 million barrels a day, Zamaninia told reporters on the sidelines of an oil conference in Tehran on Friday. He declined to specify the current level of Iran’s oil exports, but said the numbers were “much better than many assume.” There is a path for Iran's oil to return. Bloomberg reports that, “Biden’s Treasury Secretary nominee Janet Yellen said Thursday that the U.S. would only provide sanctions relief if Iran resumed its commitments under the nuclear deal. Tehran, which has been ramping up its nuclear activity in defiance of U.S. pressure, has said it would not restore its compliance until sanctions are lifted.
Reuters reports that Iran’s oil exports have climbed in recent months and its sales of petroleum products to foreign buyers reached record highs despite U.S. sanctions, the oil minister said on Friday. Bijan Zanganeh did not give figures but said exports of crude had recently risen “significantly” despite tough sanctions that were imposed since 2018 when the administration of former U.S. President Donald Trump withdrew from a nuclear pact. “We set the highest record of exports of refined products in the history of the oil industry during the embargo period,” the minister said, according to his ministry’s news agency SHANA.
The Covid crisis and Iran’s output puts the bull oil trend at risk in the short term. It will be key that oil regains the $52 handle before the close. The Energy Information Administration (EIA) report comes out today and it should be bullish assuming the market can look beyond Biden's “ Dark Winter” vision.
We could get some support from an Argus report that France's CGT trade union is calling for a 48-hour strike at all of Total's domestic refineries next month to protest against expected job losses. The union claims as many as 700 jobs could be lost as a result of Total's decision to close the 93,000 b/d Grandpuits refineries and turn it into a bio-refinery. It also says that Total is looking to lay off around 50 workers at the 222,000 b/d Donges refinery. The total has also dropped out of the American Petroleum Institute because of climate change disagreements. Also to get regulators off of their backs.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network