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
Oh yes, indeed we know, that Fed Fund rates still have a way to go, no matter what the Fed said. And love is fine for all we know, for all we know, inflation could grow, that’s what the Fed Said. So, won’t you listen to what the Fed said?
Oil prices are back on an upward track on rising China demand expectations as well as US oil inventory data that when you scratch the surface, looks wildly bullish. Yet the downside risk at this point continues to be the possibility that the US Federal Reserve drives the economy into a deep recession.
Oil and commodities were rattled on Wednesday mainly because St. Louis Fed President James Bullard seemed to suggest we ignore data that showed inflation had peaked and that U.S. Federal Reserve policymakers should get the policy rate of interest above 5% “as quickly as we can” before pausing rate increases. The warning seemed to suggest that the Fed would ignore data and just plow ahead with rate hikes without taking the time to consider collateral economic damage. His comments led to the worst stock selloff of the new year and caused a rally in the dollar and caused a crash across most commodities.
Yet, Thursday brought new speakers with a more balanced tone suggesting that the Fed may not have to destroy the economy to win the war against that pesky inflation they once thought was transitory.
We led off with Boston Fed President Susan Collins helping a rally in commodities when she said, “it’s appropriate to slow the pace of rate hikes especially since the risks are now more balanced.”
What she did say, and what the market should already know is, that she anticipates the need for further rate increases, likely to just above 5%, and then holding rates at that level for some time.” Federal Reserve Vice Chair Lael Brainard even seemed more confident by saying that the chances of a “soft landing” for the U.S. economy appear to be growing. The Fed’s next rate-setting meeting is from Jan. 31 to Feb. 1. I do not know about you, but I am really looking forward to the Fed’s quiet February 5th EU ban on Russian oil products against a backdrop of extremely tight supply.
While some tried to focus on the Energy Administration’s surprise build in crude oil, if you look beyond that, the picture is very bullish. Even with the historically large 8.4-million-barrel oil supply increase, that puts supply just about 3% above average for this time of year. Yet if you consider the fact that we have drained our Strategic Petroleum Reserve, that measly 3% is not as impressive as it sounds. Just stop and consider that our SPR inventories are down by 220.5 million barrels below where they were just a year ago. While some seem happy that we have drained our reserves to bring down gas and diesel prices, the reality is that it was a band aid that did not help us on the product supply side and because we did not allow market forces to work, will make us feel pain as those SPR releases come to an end.
The EIA said that distillate stocks hovering near a 20-year low for the time of year and are an incredible 20 percent of the five-year average. Thank goodness for a mild winter because at least in the Northeast, worries about heating oil shortages have eased.
Ken Williams with heating oil company Warm Friends said, “Imagine that, a build-in distillate in New England. A historical perspective will show that with the exception of the last 3-4 years that current inventories of distillate are higher than the historical average dating back to 2012 or so. Then take into account a rather weak winter and demand erosion from fuel switching and conservation. So we’ll have high prices and all but we’re not going to run out. We’re at 4.2MB and in the same week in 2014 we were at 1.7MB. Strangely, that week we were paying $1.66/gallon wholesale. Currently, we’re at $3.33. Fuzzy math I think. Double the inventory and double the cost. I find that curious.”
Well, the reason is the overall tightness of diesel in other areas. Finally, supplies are way too tight. Obviously, that discrepancy raises the issue of the lack of pipeline capacity and the Jones Act but I digress.
The gasoline supply is also tight and that is another reason why pump prices will soon start to rise. The EIA is sad that, “Total motor gasoline inventories increased by 3.5 million barrels from last week and are about 8% below the five-year average for this time of year. Keep in mind that there are expectations for a heavy refinery maintenance season that could further tighten supply.
In fact, refinery runs last week were extremely low due in part to the winter storm that started the year off but keep in mind these refineries might not hit the level they hit for some time because maintenance season is here. The EIA said that, “U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week was 203 thousand barrels per day more than the previous week’s average. Total demand was back up last week according to the EIA hitting 20,314 million barrels a day up from 17,627 or 2,686 million barrels a day from the week before.
Natural gas traders are looking for winter. They may get it. Fox Weather reports that 2 winter storms bringing snow to the Northeast this weekend. The first of two winter storms impacting the Northeast this weekend is bringing snow to interior portions of the Northeast today, while rain is possible near the coast. A second storm is forecast to arrive by Sunday, bringing with it even better chances for snow in the interior. Sign up to Fox Weather for Daily Weather Updates.
Make sure you stay tuned to the Fox Business Network! Invested in You!
Call to get the Phil Flynn Daily Trade Levels and open your account by calling me at 888-264-5665.
The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network
141 West Jackson Blvd., Suite 1920, Chicago, Illinois 60604
312 264 4364 (Direct) | 888 264 5665 (Direct) | 800 769 7021 (Main) | 312 264 4303 (Fax)
Please do not leave any instructions for orders in your message, as we cannot execute instructions left through email or voicemail. Orders must be entered via direct verbal communication with a representative of our firm. We cannot be held responsible for orders left in any other manner. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Investing in futures can involve substantial risk & is not for everyone. Trading foreign exchange also involves a high degree of risk. The leverage created by trading on margin can work against you as well as for you, and losses can exceed your entire investment. Before opening an account and trading, you should seek advice from your advisors as appropriate to ensure that you understand the risks and can withstand the losses. Member NIBA, NFA.
Questions? Ask Phil Flynn today at 312-264-4364