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 Powel almost got through his FMOC press conference without tanking oil prices but one of his last answers caused a sharp drop in stocks and oil. The Fed raised rates by 0.75 percentage points to a target range of 3.75%-4%, the highest level since January 2008. To no one’s surprise so it was all about the Fed statement and of course Fed Chair Powel’s answers to the press.
Powel’s statement change that was significant was a line that said that the Fed is considering the “cumulative” impact of its hikes so far. That would seem to suggest that the Fed is realizing that the impact of previous Fed hikes might not have been felt yet and they are considering taking that into account as opposed to driving the economy into the abyss. Chairman Powell in his press conference was masterful when he seemed to suggest that he is not considering a rate hike pause but seemed to suggest that a pause was on the table at the same time. He said that the Federal Reserve is ready to change policy as needed. Yet then he had to go and spoil it all by saying that, “It’s difficult to see a soft landing with rising interest rates.” In other words, near the end of his press conference, the Fed chairman said that it is going to be difficult to beat inflation without causing a slowdown in the economy if not an outright recession. Oh sure, he said that a soft landing was possible but the window for a soft landing has narrowed. Powell confirmed the market’s worst fears and basically predicted a recession. Petroleum pulled back on the thought that a slowdown in the economy would mean a slowdown in oil demand.
After looking at yesterday’s Energy Information Administration data, it’s clear that it may take a slowdown in the economy to avoid major shortages of petroleum supplies going into winter. Some of the headlines highlight the fact that US gasoline inventories fell to the lowest level since 2014. Diesel prices are 19% below the five-year average and they reported that last month, the New York Harbor spot price for ultra-low sulfur diesel (ULSD) averaged $4.36 per gallon (gal), the highest monthly average price since May 2022 and the second-highest monthly average price on record.
The other concerning headline was the fact that the Strategic Petroleum Reserve (SPR) fell to its lowest level since May of 1984. The SPR supply fell to 399.8 million barrels. The Biden administration has drawn down more than 200 million barrels from the reserve over the past year.
The reason why the SPR level is a major concern is that the risk to oil supply is extremely high. Not only is there war in Ukraine, there is also the report by Saudi Arabian intelligence that Iran plans to attack the Kingdom as well as US interest in the Kingdom. Also, Bloomberg News reported that, “Iran will respond to US killing of a top Iranian general in 2020 “when the time is right”, Supreme Leader Ayatollah Ali Khamenei says, according to state-run Islamic Republic News Agency. Iran “hasn’t forgotten” the drone strike ordered by US government that killed Gen. Qassem Soleimani, Khamenei says.
Biden decided to use the SPR mainly for political purposes and now has left the country in an extremely vulnerable position by interfering in the market and keeping prices artificially low. Biden is criticizing oil companies for not trying to raise production. Why would they when he’s flooding the market with oil in the short term. He killed the incentive to invest more in oil production by releasing oil from the reserve Not to mention all the anti-drilling policies that he has put in place.
Other data from the report was extremely bullish, especially looking at the jump up in refinery runs. The EIA says that crude oil refinery inputs averaged 15.8 million barrels per day during the week which was 406,000 barrels per day more than the previous week’s average. Refineries operated at 90.6% of their operable capacity last week.
Natural gas prices snapped back as weather forecasts turned more wintery for the last half of the month. Today we get the natural gas report and I expect a 98 injection. The EIA said that Injections into U.S. working natural gas storage in the Lower 48 states during the 2022 injection season (April through October) have brought storage levels back near historical averages. The overall increase in natural gas storage was driven primarily by five consecutive triple-digit increases in September and early October. U.S. natural gas injections totaled 427 billion cubic feet (Bcf) in September, a month that included the second-largest weekly net injection on record during the week ending September 30 (129 Bcf), according to data from our Weekly Natural Gas Storage Report (WNGSR). In September, reduced seasonal demand and strong natural gas production led to more natural gas injections into underground storage and lower natural gas spot prices.
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