New Year Hangover. The Energy Report 01/11/2023

The American Petroleum Reserve (API) reported a massive 14.865 million barrels of crude that the market is shaking off as they realize in large part it has a lot to do with a New Year’s hangover. Not only did we have the polar vortex that shut down production, pipelines, and refineries but also year-end tax consequences. The first petroleum supply reports of the year are notorious for surprise crude builds because of holiday reporting and the fact that oil companies try to plan to book new supplies of oil into the New Year to put off tax consequences into the next year.  Yet the real hangover may be the aviation shutdown that is plaguing the nation that if it lasts, could have a major impact on jet fuel demand and could have a bearish impact on the entire sector.

The Fox Business Network reported that, “The U.S. Federal Aviation Administration is suffering a nationwide technical outage resulting in hundreds of canceled flights Wednesday morning. The outage comes as a result of the failure of the FAA’s NOTAM (Notice to Air Missions) system, which alerts pilots and other personnel about airborne issues and other delays at airports across the country.  “The NOTAM outage continued with no current estimated time of restoration,” the FAA website has stated Wednesday morning. “The FAA is working to restore its Notice to Air Missions System. We are performing final validation checks and repopulating the system now,” the FAA said in a statement according to Fox Business.

This obviously is the biggest Aviation shutdown since the dark days of the September 11th attacks. Not only will oil traders want to see the system come back online but they are going to be really focused on whether or not this was just a computer glitch or something more nefarious. With all the tensions in the world right now, the trade is going to be watching this nervously. If indeed this turns out to be some type of foreign government hacking operation it could add to the risk premium across the board for oil and many other commodities.

The API also reported product supplies that were pretty much in line with expectations give or take a little bit. The API reported the gasoline supplies were up by 1.8 million barrels. They also reported that distillate inventories were up by 1.1 million barrels. Ultra-low sulfur diesel inventories rose pretty dramatically as the report gave us a reminder that supplies of the all are still very tight.

Gurgen Ayvazyan reported that, “Last week’s SPR release marked the 70th consecutive weekly release, for a total of ~250m bbls. That is ~3.6m bbls/w or ~510k bbls/d. If SPR was a country, it would have ranked 29th in the world in terms of daily production.”

This is an incredible point when you consider the fact that the SPR releases are coming to an end we’re going to be losing a major source of oil supplies for the country which means of course when China reopens, the supply side of the market is going to tighten significantly. We can’t expect warm temperatures to bail us out forever and the risk of oil and products are on the upside. That of course is assuming we can get planes back in the air.

The other criticism of the Biden administration is that they exported a lot of the SPR oil to other countries such as China. House Republicans are trying to put through a bill that will ban SPR sales to China and also make it harder for Biden to use the strategic petroleum reserve for political purposes and price manipulation. I still think that we are going to end up paying the price for the Strategic Petroleum Reserve releases.

The biggest news of the day for oil was supposed to be the Energy Information Administration report but now it’s all about the FAA grounding of the US air fleet. The market reaction to the big build from the API suggests that the market is starting to look more bullish and look ahead just a little bit. We still think there’s a chance to hit $80.00 a barrel before the end of the month if not a little higher.

Natural gas is still having a hard time shaking off the weather. The expectation is that we will have a historically small withdrawal from a supply that should improve our year over year supply situation which is currently 9.6% below where it was a year ago and 6.7% below the five year average.

Tune to the Fox Business Network to stay up with all the news!

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