Supply Versus the FED. The Energy Report 10/21/2022

Oil prices might be fighting the Fed but a warning from FERC about natural gas shortages in the Northeast and the fact that diesel and heating oil inventories are at the lowest levels since 1951, should be a reminder that despite a market that has been volatile and uncertain supplies are at dangerously low levels going into winter. Now I know it’s impossible to fight the FED and I know the northeast, when it comes to natural gas supplies, isn’t Henry hub, but the numbers on the supply side are rather disturbing.  If we do not see the economy crumble, the odds for price spikes across the board in petroleum and natural gas are likely.

On top of that, Biden’s release from the Strategic Petroleum Reserve is not going to have a long-term impact on prices. His shunning of the Kingdom of Saudi Arabia is now pushing that country into a new energy alliance with China. China and Saudi Arabia are announcing a new pact to “cooperate to maintain oil price stability.” This closeness between Saudi Arabia and China has been inspired by Biden’s diplomacy.

This came after Biden criticized OPEC Plus and tried to get them to put off their production cut until after the midterm elections. Saudi Arabia’s energy minister Prince Abdulaziz bin Salman on Friday said OPEC+ is doing the right job to ensure stable and sustainable oil markets. He was responding to questions on a recent decision by OPEC+ to cut oil output by 2 million barrels per day according to Reuters.

There has even been some talk of Saudi Arabia joining the economic cooperation organization group BRICS – Brazil, Russia, India, China, South Africa and adding another “maybe for Saudi Arabia”. In an interview on the South African Broadcasting Corporation on Tuesday, President Cyril Ramposa announced that Saudi Arabia is interested in joining BRICS. Telle-English reported that, “Crown Prince Mohammed bin Salman expressed the kingdom’s desire to join the BRICS,” the South African president said, adding that other countries are also interested in joining this organization.

Oil prices were surging on the opening yesterday, laughing at Biden’s SPR release and focusing on the tight demand situation. When reports that UK Prime Minister Liz Truss had to resign, it caused the British pound to rally and the dollar to break which fueled further support for oil. Oil survived the early morning economic data as we saw weak Philly-fed manufacturing numbers and housing sales that were disappointing but that might not be enough to stop the Fed from acting very aggressively. The break in the dollar was short-lived as oil had to fight the Fed. Oil sold off and the dollar broke when Philadelphia Fed Chief Patrick Harker suggested that markets should not get happy as the fight against inflation has just begun.

Patrick Harker said that the Fed, “is actively attempting to slow down the economy to reduce inflation.” That doesn’t sound too good for oil demand. He said that the Federal Reserve has been “disappointed in its progress in lowering inflation.” In other words, get prepared for the Federal Reserve trying to tamp down oil prices anytime they get too hot. Not necessarily with rate increases but at least with some very hawkish, nasty words. Maybe he is trying to bring oil back down below $70.00 so Biden can buy the oil back for the Strategic Petroleum Reserve.

Those comments even broke the ultra-low sulfur distillate contract which has seen extreme volatility. This is a market that switches from panic buying back to panic selling back to panic buying yet continues to surge near record high prices only to pull back in what could be described as unprecedented moves.

The Northeast in recent years has worked to get off of heating oil and move towards natural gas. And while at one time that was supposedly a very smart move because natural gas burns more efficiently and it’s not as dirty, the problem may be that there might not be enough this winter if we get cold. When one of my very good clients reminds me, the Northeast is not Henry hub. It seems to be oblivious to the fact that we’re seeing tight supplies in the Northeast.

FERC reported that In its annual summer assessment, that it sees the Henry Hub natural gas futures contract price averaging $6.82 per million British Thermal Units (MMBtu) for winter 2022-2023, up 30% from last winter’s settled price according to Reuters.  The Energy Information Administration also confirms East region working natural gas in storage is the lowest in five years ahead of the 2022-2023 winter heating season. EIA says that, “At the start of the 2022-2023 winter heating season (October-March), working natural gas inventories in underground storage facilities in the East region ended September 9% below the five-year (2017-2021) average and 6% below year-ago levels, according to data from our Natural Gas Storage Dashboard. In comparison, at the end of September 2021, working natural gas inventories were about 3% below the five-year average. Time to pull out those wooly sweaters. Also time to put on option strategies because based on that assessment, prices are too cheap right now.

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