Blunt Instrument. The Energy Report 03/08/2023

The oil market was hit with a blunt instrument as Federal Reserve Chairman said he was none too pleased with the strength of the economy and the jobs market. He said if the government keeps spending money like a drunken sailor, the only tool he has is a very effective blunt instrument that he can hammer down and crush inflation and oil prices along with the economy and take your job at the same time. Ok, he did not quite put it that way, but the reality is, that is what he meant and could not quite say.

Louisiana Senator John Kennedy did a masterful job laying out the Fed’s case by asking Mr. Powell, “When you’re slowing the economy, you’re trying to put people out of work. That’s your job, is it not?” Sen. Kennedy also suggested that based on history for the Fed to lower inflation by 2 % historically the unemployment rate would have to rise by 3.5 %. Mr. Powell responded, “We’re not trying to [raise unemployment], we’re trying to realign supply and demand, which could happen through a bunch of channels, for example, job openings.” It could also happen if the government stopped printing and giving away money but then how would we pay for the war in Ukraine and for all of those student loans?

The market took Powell’s comments seriously as he said that the ultimate level of interest rates is likely to be higher than previously predicted. He said the totality of the incoming data indicates that faster tightening is required, and we are prepared to raise rates. His comments sent the dollar soaring and adjusted the market’s interest rate expectations this year close to 5.55% up from  5.38% at the beginning of the week.

Some of that stronger-than-expected economic data coming in may include oil demand that based on recent trends, is going to rise faster than previously thought. Yesterday the Energy Information Administration raised its oil demand forecast yet again. In the EIA Short-term Energy Outlook, the EIA raised its world demand forecast by 370,000 barrels daily for a 1.79-million-barrel increase. They also raised the US gasoline consumption in 2023 and 2024 by about 2% compared with last month’s report. U.S. gasoline consumption (current forecast) (million barrels per day) will be 8.9 versus 8.7.

Oil is trying to recover after being hit over the head with Powell’s blunt instrument because if you look at things other than the interest rate and the dollar, they are supportive. OPEC suggested that despite expectations of a tightening global market they have no plans to raise production. OPEC is saying that they are concerned about a demand slowdown in the US and Europe probably because of the blunt instrument that Powell has but is saying that Asia is experiencing ‘phenomenal’ growth. OPEC’s chief Al-Ghais said OPEC is not going to raise output this year.

Russia for its part says it will continue to reduce production and will not recognize any oil price caps. Reuters reported that Russia plans to cut oil exports and transit from its western ports in March by 10% on daily basis from February, according to market sources and Reuters calculations.

The API also reported a crude draw, finally saying that US crude supply fell last week by 3.835 million barrels. This should be the start of a trend of falling crude supply.

The EIA releases its version of the report today after its admission that its oil barrel counting methods and models have been broken and need to be fixed. The EIA should report a substantial crude draw unless they must make another adjustment to reflect uncounted crude variants that could be classified as crude oil. The API did report much-needed product increases with gasoline increasing by 1.840 million barrels and distillates by 1.927 million barrels.

Regardless of the Fed adjustment, even the Fed realizes that their blunt instrument can only have a minimal effect on oil unless they cause a major recession. While the oil and product prices have to adjust for a stronger dollar and economic policy, it does not change our forecast for oil getting back to $100 a barrel later in the year. We do not believe that the tough talk from the Federal Reserve is going to slow oil demand enough this year and even next to overcome a market that will be undersupplied by at least one to two million barrels a day later this year.

As far as natural gas in concerned, the EIA now sees natural gas prices averaging $3.02 per MMBtu this year, down 11.2 percent from its previous forecast of $3.40 per MMBtu. For comparison, natural gas prices averaged $6.42 per MMBtu in 2022, the EIA estimates. The EIA has also lowered its forecast for natural gas prices for next year, to $3.89 per MMBtu, down from its estimate of $4.04 per MMBtu made in its previous report.

Corpus Christi is going to expand its export capability and that’s going to help both oil exports and natural gas exports hit record highs. Stay tuned.

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