Spring Refining Capacity Fever. The Energy Report 04/12/2023

The ever-optimistic Energy Information Administration (EIA) predicted in their “Short Term Energy Outlook” [STEO] that US refining capacity will average 90% this year and again in 2024. That’s an impressive estimate and it shows that with the US petroleum products well below average, we’re going to need to squeeze every ounce of blood out of the refining turn up that we can to make sure that gasoline and diesel prices do not soar out of control. In other words, on the refining side almost everything going to have to go perfect for the (EIA) predictions on prices to come true and let’s face it, that is a very uncomfortable feeling.

 

That’s why it’s probably a very good thing that Kevin O’Leary is thinking about building a refinery as he announced on the “Big Money Show” on the Fox Business Network. Mr. O’Leary said, “I’m going to build a refinery in America. It’s going to cost about $14 Billion. I’m going to find a state that wants to work with me. I’m going to get a permit and we’re going to do the right thing for America.”

And while that’s very encouraging having worked on a refinery project in the past, I know it’s not going to be easy. The $14 billion will probably buy close to a refinery with about 300,00 barrels of refining capacity assuming the regulatory costs associated with building the refinery do not use up all the cash. And while Mr. O’Leary might just be doing the right thing for America, it also should be very profitable because I expect refining margins to be extremely strong over the next decade or so.

 

At the same time, the EIA says that they expect that OPEC’S production is going to be down by at least 500,000 barrels a day in 2023 but they do expect it to rebound by a million barrels a day in 2024 after the output agreement expires in 2023. Again, for the EIA, hope springs eternal. I have no idea why the Energy Information Administration is just assuming that OPEC is going to raise production after their agreement expires in 2024. Obviously, that’s a far-out prediction to make but I think the way things are going right now for OPEC, they may consider rolling over that production. OPEC has said before that they want to keep spare production capacity in the system and if they raise production by 1,000,000 barrels a day, that’s going to squeeze that global spare production capacity.

 

The EIA also says that they expect the global oil markets will be in relative balance over the coming year. I guess that comes down to how you define relative. We are predicting that we’re going to see a supply deficit later in the year. Already we are seeing global oil inventories start to draw down.

 

Yesterday’s American Petroleum Institute (API) report was a perfect example of that. The API reported a tiny 377,000-barrel crude oil increase that would have been a draw if it were not for this week’s SPR release. It was also very bullish that the API reported another big 1.36-million-barrel drawdown in Cushing, OK. The report also showed that refiners, despite their best efforts, are not making any progress in building supplies with diesel supplies falling by 1.98 million barrels and gasoline supplies increasing by fumes at 450,000 barrels. The EIA has also admitted in the past that their demand estimates probably underestimated demand. In the STEO, the EIA raises their forecast for world oil demand growth by 60,000 barrels a day and demand at up 1.85 million barrels year over year for 2024 but in 2023 they cut their forecast by 40,000 barrels a day. The EIA says that the Brent crude oil spot price will average $85 per barrel (b) in 2023. That’s up $2 a barrel from their last forecast. The EIA also warned that despite their higher price forecasts the recent banking issues could result in lower oil prices. So much for the optimism earlier in the report.

 

That’s why for oil traders, it’s very important to look at today’s consumer price index. A hot inflation number could cause the dollar to rally and cause oil to fall. If inflation is in check, look for a big rally in oil because our expectations are the EIA report for the weekly inventories will be very supportive. The Energy Information Administration also forecasts gasoline prices are going to peak at 350 a gallon to 360 a gallon in June. OK we’re back to being optimistic.

 

The EIA says that mild winter weather in the first quarter of 2023 (1Q23) resulted in natural gas inventories ending the withdrawal season (November–March) 19% higher than the five-year (2018–2022) average. We forecast natural gas inventories will end the injection season (April–October) at 3.8 trillion cubic feet, 6% above the five-year average. The EIA forecasts that the Henry Hub natural gas spot price will average about $2.65 per million British thermal units (MMBtu) in 2Q23 as natural gas inventories begin to rise. With inventories remaining above the five-year average in 2023, we expect natural gas prices to average less than $3.00/MMBtu for 2023, a more than 50% decrease from last year. Yet natural gas is showing little signs of a bottom. The potential for some hot weather coming in will keep it in check. And while the hot weather may only have a short-term impact in natural gas prices, the longer-term outlook for weather from some forecasters are raising some eyebrows. There is more and more talk of a super El Nino which could impact not only natural gas but the grain markets, oil markets and the coal markets.

 

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

 

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