China Is Not Going Away. The Energy Report 02/09/2023

I do not want to burst your balloon, but China and its oil demand is not going away. Oil price shook off what you might call a somewhat bearish Energy Information Administration (EIA) as it is becoming clear that these short term increases in crude and product supplies are still not sufficient against a backdrop of the Chinese economy reopening.

Oh yes, there were naysayers and doubts about the China lifting of covid restrictions. Admittedly there have been some false starts. The fears were that rising covid cases would force China to reverse course.  Yet based on recent data it is clear that China has crossed the Rubicon and for oil demand that means no turning back. Javier Blass of Bloomberg pointed out that the mobility indicators in China are soaring.  He says the number of passengers using the metro in Beijing rose yesterday to 1-year high of nearly 1 million. Anecdotal data on traffic jams point to much higher gasoline demand. Tim Dallinger also pointed that Chinas domestic airline travel hit an all-time high over the Lunar Day holiday season. Perhaps there is pent-up demand to say the least. Yet while international flights still lag, one would expect they will start rising as China’s reopening of its economy gains steam.

That may be another reason why Saudi Arabia felt confident enough in Asian demand to raise its crude prices with little fear of losing market share.

It may be why traders took little comfort in EIA data that showed that total commercial petroleum inventories increased only by 3.4 million barrels last week. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.4 million barrels from the previous week. At 455.1 million barrels, U.S. crude oil inventories are about 4% above the five-year average for this time of year. Yet while many bears tout that based on official data crude supplies have yet to draw in the new year, there are strong signs that this is about to start changing and perhaps in a big way.

The reports showed that US crude imports were up and our exports down and that will change after refiners start to reopen. The EIA showed refiners are starting to make a slow comeback as they reported U.S. crude oil refinery inputs averaged 15.4 million barrels per day which was 448 thousand barrels per day more than the previous week’s average. Refineries operated at 87.9% of their operable capacity last week. Gasoline production decreased last week, averaging 9.1 million barrels per day. Distillate fuel production slightly decreased last week, still averaging 4.7 million barrels per day.

And while the EIA did report that total motor gasoline inventories increased by 5.0 million barrels from last week, they are still 6% below the five-year average for this time of year. The EIA said that distillate fuel inventories increased by 2.9 million barrels last week but are 15% below the five-year average for this time of year. Some say that crude supply is above average but keep in mind that SPR stocks are a whopping 215.9 million barrels below a year ago.

Gas prices may stop rising at the pump, but we are still poised for another retail gas increase as we head into summer. The EIA reported that a Colorado refinery outage is leading to higher gasoline prices in the Rocky Mountain region. On December 24, Calgary-based refiner Suncor shut down its 103,000 barrel-per-day (b/d) oil refinery in Commerce City, Colorado. Suncor announced that extreme cold weather earlier in the month had damaged equipment and that the repairs would require a full shutdown of the facility and delay operations until the end of the first quarter of 2023. The refinery outage may complicate the supply of gasoline and diesel in the Denver area and, more broadly, the Rocky Mountain region.

Oil Price reported that India gets a pass when it comes to buying Russian oil. Asia News International reported that in a tweet, citing a U.S. Assistant Secretary of State. The U.S. official was commenting on calls from Ukraine to impose sanctions on India for continuing to buy Russian crude. “We’re not looking to sanction India. Our partnership with India is one of our most consequential relationships,” Karen Donfried, Assistant Secretary of State for European and Eurasian Affairs, said. Even so, according to Geoffrey Pyatt, Assistant Secretary for Energy Resources, the purposes of the price cap are being served.

“Even though India isn’t a participant in the price cap, it has effectively used its negotiating leverage which it derives from the price cap and the fact that large portions of the global market are no longer accessible to Russia, to drive down the price of Russian crude,” he was quoted as saying by ANI.  

The US is denying a report by Seymour Hersh from the New York Times that they blew up the north stream to pipeline. Russia, for their part, is calling for retaliation and an investigation. in the meantime, we may put to the test the EU price caps on Russian oil in a few months. I predict it will not be pretty.

Natural gas is back to falling like a knife mode. While the market is tempting to buy because it’s historically cheap, the fundamentals in the short term look extremely bearish. It’s a shame that the natural gas does not have liquidity in back month options because that would be the way to play this. The market does not have any open interest so it’s going to be a tough trade. Either you wait for an absolute bottom or have deep pockets to ride it out which could be a very long sell off. Today the EIA has its report on natural gas inventories, and we expect to see a pretty good 210 BCF withdrawal but that won’t be enough to overcome the warm weather forecast that we’re getting for much of the country.

The most important thing you can do today is to invest in yourself. Tune to the Fox Business Network because they are invested in you.

It’s also time to call to get the Phil Flynn Daily Trade Levels and open your account. Call me at 888-264-5665 or e-mail me at Plynn@pricegroup.com.

 

 

 

Questions? Ask Phil Flynn today at 312-264-4364