Pay No Attention. The Energy Report 01/19/2023

Pay no attention to the dismal retail sales data or data that shows that inflation is cooling or even signs that the US may be headed into a recession. That does not matter.  At least that’s according to the president and CEO of the Federal Reserve Bank of St. Louis James “Jim” Bullard.

Mr. Bullard helped inspire a reversal in markets when he said, “the Fed should move as quickly as possible to reach its 5% target rate then react to data”. That seemed to suggest that the Fed should ignore flashing recession signals or falling inflation! The data does not matter! All that matters is that the Fed rates 5% and regardless of the consequences. Well, if that is the case then why wait? Raise rates to 5% now and get it over with.

Oil traders initially bought on the data that showed that US retail sales fell by 1.1% in December, the largest drop since December 2021, and core PPI, which excludes the volatile food and energy sectors, came in at 5.5% below the 5.7% expectation. That data should have been very bullish for oil because it would come with the assumption that the Federal Reserve was not going to continue to be really aggressive when it comes to raising interest rates or a sign that the Federal Reserve was starting to make progress on their war on inflation. That assumes that the Federal Reserve would look at this data and not waver off their path of slowing down the size of interest rate increases soon. Market expectations expect that the Federal Reserve is going to raise rates by 25 basis points at the next meeting.

Yet Mr. Bullard’s declaration that the Fed had more work to do took away some of the enthusiasm that the war on inflation is beginning to be won. It also reduced market confidence that the Federal Reserve can engineer a soft landing. For Mr. Bullard, it’s 5% or bust. In other words, we need to create more pain in the economy before the Federal Reserve will feel comfortable. It wasn’t just Mr. Bullard. Cleveland Fed President Loretta Mester said,” I just think we need to keep going, and we’ll discuss at the meeting how much to do.”

The Fed report also was not helpful. It showed that wage pressures remained high across all districts although 5 reserve banks reported that they had eased slightly. They also said that overall they expected little growth in the coming months. Overall most district employment increased at a slow to moderate pace and there were five districts that reported a slight increase in activity. The Fed caused the dollar to rebound from what had been a pretty good downtrend and commodities that were soaring, like copper, reversed as did oil and products. This morning the ECB is talking hawkish as well and today that is helping the dollar bounce back

Energy secretary Jennifer Granholm doesn’t seem to understand how the oil market works. The energy secretary yesterday blasted a Republican bill that would limit the president’s ability to use the Strategic Petroleum Reserve. The Energy Secretary seemed to suggest that the Republican bill would reduce the oil supply and raise gasoline prices. Yet she doesn’t offer any evidence of this. In fact, it is quite the opposite. Now that the Strategic Petroleum Reserve release is coming to an end, we’re going to start to see the snapback of that policy and we’re going to see it in tighter supplies in the future and the lack of investment in fossil fuels.

The American Petroleum Institute (API) report showed a massive 3.7-million-barrel crude oil increase in Cushing, OK. That was due in part because of refinery shutdowns and pipeline issues due to the storm. This lead to a much bigger-than-expected increase in crude supplies of 7.6 million barrels. Yet at the same time, we saw US distillate stocks fall deeper into the abyss falling by a surprising 1.8 million barrels. Coming into the week, the supplies were 17% below average and that’s still the soft spot of the petroleum complex. Despite the big build in crude supplies, the drop in distillate inventories should keep support under the market.

Especially as we head into maintenance.

Reuters reports that U.S. oil refiners plan twice as many refineries overhauls this spring as usual, aiming to resume maintenance delayed by the pandemic and by the lure of record-high margins.

The size of the planned outages suggests supplies of gasoline and diesel could tighten and margins rise as the European Union’s Feb. 5 ban on imports of Russian petroleum products takes effect, increasing the call on U.S. fuels.

Despite the negativity coming from the markets in the short-term, China’s reopening and demand rising in Japan it’s very supportive. Reuters reports that Japan’s customs-cleared crude oil imports rose 8.5% in 2022 from a year earlier, while the value of imported crude oil jumped 91.5% to 13.27 trillion yen due to soaring oil prices and a weaker yen, the Ministry of Finance (MOF) said on Thursday. Japan, the world’s fourth-biggest crude buyer, imported 2.70 million barrels per day (156.62 million kilolitres) of crude oil last year, the preliminary data showed.

The International Energy Agency, which has a habit of underestimating global oil demand is predicting a record-breaking year. The IEA said that China’s swift reopening of its economy caught them by surprise and now says that oil demand could rise by 1.9 million barrels per day to reach a record 101.7 million barrels per day. No word on where they think that extra supply is going to come from.

Natural gas flip-flopped to the downside after doubts arose about the forecast for winter returning to the United States. BAM Weather BamWX said that, “A cold pattern settles into the end of January in the Central US. No guarantees, but this is also a substantially better setup for Winter Weather for the Midwest, OH Valley, and Mid-Atlantic. They also say that the GEFS and the EPS models are swinging in opposite directions to end Jan/start Feb in the E. US. One for warmer EPS E. US trends. And one for colder GEFS N/E US trends. They say there’s some merit to both signals. They are going to be keeping a close eye on the last week of the month.

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Call to get my wildly popular Daily Trade Levels on all major futures markets by calling Phil Flynn at 888-264-5665 or emailing me at pflynn@pricegroup.com.

Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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