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
Fed Chairman Jerome Powell seemed to suggest that the Federal Reserve is no longer going to be offering forward guidance about future interest rate decisions but instead is now becoming data dependent. That is welcome news to commodity speculators who like pre-report volatility. Chairman Powell seemed somewhat confident in his press conference yesterday and seem to signal that the Fed believed they were getting closer to theoretical neutral rates and had the semblance about him that the Fed was on a path to defeat this inflationary scourge.
No matter how you interpret what Chairman Powell said, the oil market obviously took it as very bullish. The suggestion that the Fed might not be as aggressive in raising rates reduces the strength of the dollar somewhat and gives the oil markets some upside.
JP Morgan, in their assessment that the ECB would not be able to raise interest rates by 3/4 of a basis point before the Fed announcement, caused oil prices to plummet the day before. We’re reversing course as it seems that central bankers are less panicked about inflation and feel like they can get it under control. More than likely it’s getting under control because the economy is slowing just a bit.
Based on the demand numbers that we saw in the Energy Information Administration (EIA) report yesterday, you would have to say that the talk of demand destruction is still greatly exaggerated or at least somewhat exaggerated. Probably one of the most notable things in the report was the fact that the US set a record in crude oil exports coming in at a whopping 4.55 million barrels a day. That was a 21% increase from the week before. Compare that to the Strategic Petroleum Reserve release from last week which was 5.6 million barrels, and you look at how far US inventories are below the five-year average. If you include exports of refined products, exports hit a record high export total of 10.9 million barrels a day.
The second most notable part of the report is the fact that total US petroleum stocks are at the lowest level since 2008. And even though we’ve seen some signs of moderation, the supply side is so low that there’s not any buffer in the event of upper demand surprise of war or another supply reduction event.
Yes, petroleum inventories fell by 9 million barrels overall. Demand in the United States bounced back in the major categories like gasoline demand and distillate demand. The EIA reported the gasoline demand hit 9.245 million barrels a day which was up 724,000 barrels a day from the week before. The EIA also reported that distillate demand was at 3.750 million barrels a day and that was up 53,000 barrels a day from the week before.
So even if demand hasn’t been as strong as some people think, the question you have to ask yourself is if that’s the case, then why are petroleum inventories are falling so dramatically? According to Reuters, petroleum inventories have fallen in 80 of the last 108 weeks by a total of -438 million bbl since the start of July 2020.
So we have tight inventories in the United States and you’re exporting a record amount of oil to bail out Europe because of the war in Ukraine. Perhaps it’s not the best time to be talking about an oil price cap on Russian oil and gas exports. Yet global leaders have a fantasy that somehow a price cap will work and reduce revenue to Russia. It was reported that the Group of Seven richest economies expect to have a price-capping mechanism on Russian oil exports in place by Dec. 5, when European Union sanctions banning seaborne imports of Russian crude come into force, a senior G7 official said on Wednesday.
What makes this crazier is that they’re talking about a price cap on December 5th right when winter it’s about to get started. Maybe we should all try this price cap idea. Biden says that gasoline stations are making too much money so we should put a price cap on gasoline. When I pull into the station, the pump says $5.00 a gallon. I am going to walk in and tell the person at the desk that I am capping my price at $4 a gallon. So, he’s going to have to give me a rebate. I wonder how that’s going to work out. Maybe someone else should try that first.
Right now, it looks like oil is breaking out of its recent corrective downtrend and is turning back higher. There’s a very high probability that crude oil could once again surpass $100 barrel and perhaps that could happen today. The back end of the curve still looks very attractive for hedging so if you haven’t done so this might be a great opportunity as it has been the last couple of days selling.
European natural gas is again soaring and supplies from Russia are sporadic. US natural gas prices pulled back after a historic run in the hope that hot temperatures will ease a bit even though there are spots of the country that are going to remain very much above normal. Long-term charts of natural gas still look like they have a long way to go on the upside. Short-term we’ve done some back and fill from the historic record-breaking run that we had this month. The trade will be very volatile. We want to buy brakes if possible. Kremlin Spokesman Peskov: We hope that Nord Stream 1 turbine will soon arrive at Portovaya station and will be installed. The European natural gas market isn’t buying that supplies from Russia are going to be reliable, to say the least.
Today’s GDP print will give us perhaps an opportune time for positioning.
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