Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Oil prices were crushed on demand concern surrounding the revolving omicron variant of the COVID-19 plague got hit harder after Federal Reserve Board Chairman Jerome Powell told Congress that it was time to retire the term “transitory”. He said that transitory means different things to different people. What does transitory mean to you? I assumed that when it came to inflation it meant that it was temporary and would soon fade away. So, I guess instead of admitting that you were wrong about inflation being transitory, we just retire the word. I like that idea. I am going to think of some words I want to retire. Maybe instead of being wrong, I will say I was factually challenged.
The Fed chairman’s fond goodbye to the term transitory along with a promise to speed up the tapering of bond purchases, caused a big spike up in the dollar and caused the commodity complex across the board to get crushed. Yet retiring the word transitory could mean that we put in a capitulation bottom both for oil prices and stocks after the massive sell-off we have seen the last couple of days. Oil prices that dipped into bear market territory, are now putting in their best performance in days and could signal that the Powell drop was not transitory but may have been the final capitulation drop. The oil market broke well below the 200-day moving average and is now back above the current 6749 200-day moving average level.
Up until this point, the fundamentals for oil aren’t as bad as the market price would have you believe. We do know that the omicron virus has impacted travel demand and will continue to do so in the future but the market seems to be pricing in a much larger lockdown than should happen.
Looking at the number of hospitalizations up until this point it’s been very small and even though this variant could be more contagious. According to reports out of Africa and WHO, the symptoms are relatively minor. I’m not a doctor but at the same time I do think based on what we’re seeing the price action has gone far beyond reality, reinforcing the possibility that we have seen a capitulation bottom in oil. Let’s just hope this capitulation bottom isn’t transitory. Oops, I forgot we retired that word. Let’s hope it’s not temporary.
We also got the American Petroleum Institute (API) supply report that did show a modest drawdown in crude supplies after 1.9 million barrels were released from the Strategic Petroleum Reserve. The API reported that crude supply fell by 747,000 barrels with a one million barrel increase in Cushing, Oklahoma supply. Gasoline Inventories increased by 2.2 million barrels and distillate by 800,000 barrels. The Energy Information Administration report comes out at 9:30 central time there is a possibility that we will see a larger draw in that report.
Javier Blass of Bloomberg tweets that OPEC and OPEC+ are meeting (virtually) today and tomorrow — if you care to know, this is the 11th meeting of the year, which sets a new annual record surpassing the 7 gatherings of 2003 and beating the 6 meetings of years including 1974 and 1986. We know that OPEC is watching this drop and the plan was to add about 400,000 barrels a day on production, the dynamics for OPEC plus have changed since the last meeting. Biden tried to send a message to OPEC plus by engineering a release from global strategic petroleum reserves. It has been widely reported that most of the oil released from the United States is going to end up in China and India because of the quality of the oil.
The Biden administration’s press secretary Jen Psaki said she was disappointed that we didn’t see a bigger drop at the pump, not realizing that it does take a few days for these price drops to filter through the system. She might be further disappointed if the OPEC plus cartel decides to pause on their production increase.
OPEC plus does have political cover to do so. They could win some brownie points with the Biden administration if they decide to continue along the course. Some reports say that OPEC members are suggesting that they will continue with the plan to raise production by 400,000 barrels a day. Yet even so it is unclear as to whether or not they will fulfill that commitment. Reuters reported that OPEC pumped 27.74 million barrels per day (bpd) in November an increase of 220,000 bpd from the previous month but below the 254,000 increase allowed under the supply deal. So even if they say they’ll raise production by 400,000 barrels a day and they do not, will it matter to the global marketplace? Probably not.
Vladimir Putin is telling US embassy personnel in Moscow who have been there for three years to get out of the country by January 31st. Tensions continue to rise as NATO forces are reportedly coming close to the Ukrainian border with Russian forces on the other side. It looks like a little bit of a chess game right now but the geopolitical risk factors are running high.
Reuters reports that China told Indonesia to stop drilling for oil and natural gas in maritime territory that both countries regard as their own during a months-long standoff in the South China Sea earlier this year, people familiar with the matter told Reuters. The unprecedented demand, which has not previously been reported, elevated tensions over natural resources between the two countries in a volatile area of global strategic and economic importance.
Natural gas futures are still down a bit but the big picture going into next year is suggesting a tightening market. In the short term the market is pressuring us to the downside yet any change in the weather should give us a little bit of a pop-up. We’re putting on bullish options strategies on this dip in that could be a situation where you might want to even start looking at the summer months.
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