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
The petroleum and natural gas market crashed and is a sign of relief that the US rail strike was reportedly averted. The plunge was led by the winter fuels such as ultra-low sulfur diesel and natural gas and put downward pressure across the entire commodity complex. Yet while the strike was averted the potential undersupply of both natural gas and diesel going into winter has yet to be averted. in the short- term we may see more volatility and weakness, but supply tightness has not gone away. Nor have the geo-political risks.
Bloomberg News reported that, “Germany seized the local unit of Russian oil major Rosneft PJSC as Berlin moves to take sweeping control of its energy industry, secure supplies, and sever decades of deep dependence on Moscow for fuel. Alongside its move for the Rosneft unit, Chancellor Olaf Scholz’s administration is in advanced talks to take over Uniper SE and two other major gas importers, Bloomberg reported on Thursday. Europe’s largest economy is pressing ahead with a historic overhaul of the energy system to prevent shortages this winter.” That move Germany made is not going to please Russian President Vladimir Putin. On top of that, the G7 is going to put a price cap on Russian oil and gas which is only going to increase the odds that Vladimir Putin will cut off supplies this winter.
The self off in oil products and natural gas also seem to be taking into account rising fears of a recession. Reports that FedEx is not going to offer guidance is another sign that the economy is facing some turbulence ahead. And even though that may impact oil demand, we have to remember this is going to come at a time where more than likely China’s economy is going to reopen. The key thing you have to remember is that even with China being that down, global demand is still exceeding supply. Global inventories really are not building. Once we stop releasing oil from the Strategic Petroleum Reserve we’re going to start to see big drawdowns in supply. China is already talking about reopening refineries more than likely so that they can refine Russian oil and send the product to Europe.
The International Energy Agency this week warned about widespread switching from gas to oil for heating purposes, saying it will average 700,000 barrels per day (bpd) in October 2022 to March 2023 – double the level of a year ago. The IEA expectations for weak supply growth helped boost the market.
In the short term we may see some continued weakness because of recession fears but the reality at some point it’s going to sink in and then I think we will see oil prices rebound back to over $100 a barrel sometime in the month of October. We got through the October crude oil options expiration and that put further downward pressure on prices we still have to get through the October futures expiration but after that, we should start developing a pretty solid bottom once we go into winter. Stephane Kelly Noah Browning and Laura Sanicola at Reuters wrote that, “Oil prices have tumbled by around a quarter in the past three months, largely due to fears of a prolonged slump in global energy demand. But no major forecaster is actually predicting one.
Two of the most closely followed predictors of global oil demand, the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) – the West’s energy watchdog – see it growing by between 2% and 3% this year and next. That’s nearly double the yearly average in the decade before the Covid-19 pandemic struck in 2020 when annual growth in global oil consumption averaged 1.2 million barrels per day (bpd). Despite economic storm clouds from Beijing to Washington, neither forecaster expects the post-pandemic rebound in oil consumption to be significantly marred by a possible recession. “We are still optimistic,” OPEC’s new Secretary General Haitham Al Ghais told Reuters last month. “In 2023, there will be a slowdown in growth but it will not be something that we currently anticipate to be lower than historical norms.” Generally bullish, the group of 13 oil exporting nations predicts an increase in demand of 3.1 million bdp this year and 2.7 million next year.
The IEA – which acknowledged this week that demand growth would stall in the final three months of this year – still expects a 2 million bpd rise in oil consumption overall in 2022, to be followed by 2.1 million in 2023. And major Wall Street banks are striking a similar tone. Investment bank Goldman Sachs forecast in August that demand would rise next year by 2 million barrels – despite the signs of an economic slowdown from China, to Europe and the United States. JP Morgan, meanwhile, reaffirmed this week that growth in oil demand would remain resilient, citing “our expectation that the global economy will stay out of recession” according to Reuters.
Natural gas prices also plunged even after a bullish report that should raise concerns about natural gas supplies as we head into winter. The selloff was a reversal of the previous day’s spike on the railroad concerns. Word that coal would not move and utilities would have been forced to switch to natural gas also saw pressure because tropical storm Fiona is less likely to cause havoc in the Gulf of Mexico. The EIA said that working gas in storage was 2,771 Bcf as of Friday, September 9, 2022, according to EIA estimates. This represents a net increase of 77 Bcf from the previous week. Stocks were 223 Bcf less than last year at this time and 354 Bcf below the five-year average of 3,125 Bcf. At 2,771 Bcf, total working gas is within the five-year historical range.
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