Into The Gap. The Energy Report 04/20/2023

Oil prices seem to want to fill the price gap created by the price spike after the OPEC production cut announcement. The weakness in oil is not being driven by current oil market fundamentals but really on fears that demand is going to collapse due to the Fed that will most likely continue in its rate hiking cycle without a pause. Also, the fact that the Federal Reserve boldly predicted a mild recession which is weighing on oil market sentiment, yet they failed to predict inflation. The market did not like the fact that the Federal Reserve Bank of New York president John Williams said credit conditions would likely deteriorate because of the bank crisis in March.

 

The sell off in oil seems to give some credence to OPEC’s reasoning for an oil production cut even with more predictions that oil demand is projected to go to record highs. The market thinks a recession could derail that. Yet if OPEC is wrong and the market is too pessimistic, we are setting up for an even larger supply deficit this year.

 

Last week the International Energy Agency (IEA) predicted that global oil demand would grow by 2 million barrels per day (bpd) in 2023 to a record 101.9 million bpd, driven mostly by stronger consumption in China after the lifting of covid restrictions. Yesterday, OIL Price reported that Standard Chartered is predicting that global oil demand will set a new all-time high of 102.24mb/d in August. And hit fresh all-time highs in both November and December.

 

In the US oil demand is solid though some were concerned that week over week gasoline demand did not grow as much as some thought it would. Is there already some pushback from rising pump prices or is it because the driving weather has not been perfect. Retail gas prices rose yet again as AAA said that gas prices increased to $3.686 a gallon up from $3.443 a month ago. Or maybe we need to focus on the four-week moving average demand number to get a better picture. The Energy Information Administration (EIA), in their weekly report stated that gasoline demand over the past four weeks averaged 9.0 million barrels a day, up by 3.5% from the same period last year. In fact demand across the spectrum in yesterday’s report was solid and far from inflationary. The EIA showed that total petroleum demand on the four week moving average averaged 19.9 million barrels a day, up by 2.5% from the same period last year.

 

Distillate fuel demand also averaged 3.9 million barrels a day over the past four weeks, up by 4.9% from the same period last year. Jet fuel product supplied was up 5.4% compared with the same four-week period last year. So, if the economy was too hot for the Fed a year ago, what does this tell us about what the Fed might do now.

 

Yet despite the run-up in gasoline prices, the EIA is assuring us that we do not have to worry about gas prices breaking the records set last year. They reported that, “in our April Short-Term Energy Outlook (STEO), we estimate that U.S. retail gasoline prices this summer for regular-grade gasoline will average about $3.50 per gallon (gal), or about 80 cents/gal less than the price last summer, which was the highest price since summer 2014. The summer average includes retail prices from April through September. Lower forecast crude oil prices compared with last year are one of the primary reasons we forecast lower gasoline prices this summer. We estimate gasoline prices (despite being lower than last year) will increase slightly from current levels later in the summer because of seasonal factors and rising crude oil prices.

 

Excuse me if I am not comforted by that prediction. US refining capacity is strained and will become more strained if predictions of weakening demand do not come true. The EIA said that, “U.S. crude oil refinery inputs averaged 15.8 million barrels per day during the week ending April 14, 2023 which was 260 thousand barrels per day more than the previous week’s average and operated at 91% of capacity. That 15.8 million barrel crude run is far short of what will be needed to meet demand this summer. This comes even as Bloomberg reports that, “Global net oil refinery capacity fell in 2021 for the first time in more than 30 years, but in 2023-24 it’s set to post its stronger two-year growth since 1977.”  They report, “net global refinery capacity will increase by 1.5 million barrels a day this year, and by another 2.4 million next year. The combined 2023-24 boost is the largest two-year increase in net global refining capacity in 45 years.

 

It is not like the US is swimming in petroleum. The EIA says that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.6 million barrels from the previous week. At 466.0 million barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Yet another release from the SPR that put supply at a 40 year low makes that so called 2% supply cushion look suspect.

 

Republican lawmakers are showing concern about the integrity of the salt domes that hold our nation’s strategic reserves, an issue that we bought up in The Energy Report long before anyone was talking about it. Reuters reported that, “some Republican members of Congress had become worried that the release of 180 million barrels of crude from those caverns had damaged their structure. The cause of worry is the fact that oil is withdrawn from the caverns through the injection of water, and water can dissolve the walls of the caverns, which affects the storage space.

 

The SPR withdrawals from last year led to a “rapid depletion of the SPR” that “may have caused damage to SPR’s pipelines and caverns, compromising its ability to meet its energy security mission in the event of a true energy supply interruption,” Republican Senator John Barrasso and Representative Cathy McMorris wrote to Energy Secretary Jennifer Granholm last year.

 

While the Biden administration is dismissing those concerns, high level sources, as I have suggested, says the issue is all too real. That is going to be another hurdle in refilling the reserve and will be another added expense for taxpayers. It also is raising question as to whether Biden is going to be held accountable for his misuse of the global reserve and using them before the War in Ukraine. Yikes, who am I kidding. It seems no one wants to hold Biden accountable for anything. Especially his own party. Gas prices go up it’s due to the US oil companies that price gouge and war profiteers or that nasty Russian Putin. They go down it is because of the great Biden administration policies that none of them can articulate. I must memorize the talking points better.

 

Corn farmers are smiling! Oil Price is reporting that the Biden administration plans to begin year-round sales of E15 fuels across eight states in the Midwest next year, Reuters has reported citing the Environmental Protection Agency. According to the EPA, the move will help reduce retail fuel prices but there was not enough time to finalize all the necessary regulations by this summer so the start had to be postponed until 2024.

 

Natural gas prices are bottoming, and we like to look to July and August as El Nino predictions bring more heat. Globally the FT reports that, “Natural gas consumption in the EU fell almost 18 per cent in the eight months to March, exceeding the bloc’s target and easing fears of energy shortages caused by massive cuts to Russian imports. The large drop in gas usage by European households and businesses was aided by a milder winter. But it also reflected energy conservation efforts, the shutdown of some energy-intensive industrial activity and a switch to alternative fuel and power sources following the sharp rise in prices that followed Russia’s full-blown invasion of Ukraine last year.”

 

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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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