Energy is in short supply

Energy is in short supply

The main reason for today's gains is the threat of a shift to more oil for electricity. Bank of America estimates there could be as much as 1.8 million barrels per day of potential crude demand from that switch, as utilities balk at high natural gas prices.

To illustrate, at $65, TTF European benchmark gas prices are equivalent to nearly $150 oil, so switching is a compelling value proposition.

Other factors boosting oil:

  1. Tightening US supplies as outages in the Gulf of Mexico persist (30% still offline). Though it's improving, the cumulative shut-ins now add up to 27.3 million barrels
  2. China's initial SPR release wasn't as large as feared. We saw this in copper as well. The market was spooked by vague headlines but when details started to emerge, it bounced back.
  3. Delta continues to recede and the market is gaining confidence that economies can remain open through the next (final?) wave
  4. Today's US inventory data and preliminary estimates of a draw of nearly 4m/b next week

On the flipside, I worry about China and bottlenecks eventually hitting demand, especially after today's poor Chinese retail sales data. Iran could resurface as well.

Technically, the rally today definitively busts through the late-August top into some clear air. The drag in early August was delta and I think it's abundantly clear that it's not going to rock demand as much as feared.

There's a lot to like here.