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
Bank Daze. The Energy Report 03/22/2023
Treasury Secretary Janet Yellen said yesterday in remarks before the American Bankers Association that, “The dollars status of the reserve currency should be cherished and should not be jeopardized.” Well then Secretary Yellen, tell your boss to quit spending money!
Treasury Secretary Yellen tried to bring confidence back to the US banking system but she looked not so convincing as she had something like a three ring binder with answers to questions similar to what Press Secretary Karine Jean-Pierre has during her press conferences. She seemed to suggest that she was willing to take additional action to help out small banks but stopped short of a full-blown guarantee of all depositor’s capital. She said that, “There’s time to evaluate whether some adjustments are necessary in supervision and regulation to address the root causes of the crisis,” she said. “What I’m focused on is stabilizing our system and restoring the confidence of depositors.”
Yet the perception of a bank guarantee seemed to allow oil to come back up but the collateral damage from the price crash will only serve to tighten oil supplies more severely later in the year. Bloomberg is reporting that the, “US shale patch may lose as much as 20% of its activity over the next year if energy prices hold at current levels, according to one of the biggest private equity players in the industry. Crude would need to rise by about 15% to $80 a barrel, and gas would have to climb by more than a third to $3 per million British thermal units for drilling and frack work to maintain its current pace, Quantum Energy Partners Chief Executive Officer Wil Van Loh said in an interview Tuesday.
Not only have some traders had their confidence in the banking sector crushed but confidence in oil data that the Energy Information Administration admits may not reflect the actual amount of oil that is ready to be used as well. Yesterday, The American Petroleum Institute reported that crude stockpiles rose by 3.262 million barrels during the week ended March 17. That number seems to be out of line with reports of record exports by the US. Products did fall as the API reported a 1.09Million barrel draw in gasoline stocks for last week and a 1.84-million-barrel drop in distillate stockpiles. I would expect to see more bullish numbers in today’s Energy Information Administration (EIA) report.
The tightness in product supplies probably means that any relief at the gas pump will be short lived. Reuters is reporting that, ”As U.S. refiners rejigger operations to reflect declining domestic motor fuels demand in the next decade, they will seek to maximize diesel and biofuels production for exports, industry analysts say. A rationalization of global refining capacity along with Russia’s continued war in Ukraine has encouraged U.S. refiners to prioritize distillates as global diesel inventories sagged and demand jumped. At its peak last year, U.S. refiners were exporting a record 1.57 million barrels per day of distillate fuel, with profit margins topping $70 a barrel, more than double that of gasoline.
Yet while oil inventories might matter, the Fed will trump almost everything. The Fed has bad credibility and so they will be forced to raise interest rates to avoid looking bad. Yet based on the stress in the banking system, they probably should be cutting rates or at least taking a pause. Making banks insolvent is not a good plan to beat inflation.
Geopolitically the world is more of a mess. Biden’s foreign policies have made friends of our enemy’s enemies. His shunning of Saudi Arabia not only has driven Saudi closer to China but now has even made peace with their archenemy Iran. Chinese President Xi Jinping and Russian President Vladimir Putin now are in a economic and business pact that will shun trade in the US dollar. You Remember the U.S. dollar, right? The world’s reserve currency that should be cherished according to Treasury Secretary Yellen. Does anyone believe that the world is a safer place because of Biden’s foreign policy?
Throughout the bank turmoil we feel oil and products have become way too cheap. While many have taken to the possibility of triple digit oil this year, I still think the fundamental case for triple digit oil this year still exists. Demand should rise dramatically because of China’s record-breaking demand. Russian Deputy Prime Minister Alexander Novak said yesterday that Russia will continue a 500,000 barrels per day oil production cut until the end of June. Global central banks will have to slow interest rate hikes. The dollar should weaken and because of the state of global geopolitics the risk to supply is high. Get hedged because the upside price risks are huge especially if the market senses that this banking crisis can be brought under control.
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