Bank Bobble. The Energy Report 04/25/2023

Oil prices looked as if they were going to mount a rally before old banking worries reemerged. Oil double bottomed yesterday on Friday’s 7672 low which was a sign that the OPEC monster upside gap from 7583 on the chart may not get filled right away. Yet just as oil started to slowly probe the upside, the market sold off on macro fears on reports that First Republic Bank might have failed if it was forced to sell its portfolio.

The Wall Street Journal that said that, “Customers pulled about $100 billion in deposits out of First Republic Bank last month, when a pair of bank failures shook Americans’ faith in regional lenders. The bank’s first-quarter earnings report Monday detailed its precarious financial situation following the massive withdrawals.” The Journal said that, “Deposits fell more than 40% to $104.5 billion at the end of the first quarter, from $176.4 billion on Dec. 31. The news again raised worries that demand for oil could be hurt if banking failure fears return. The massive sell-off in oil was a direct result of the unwinding of hedges and bank liquidation as they scrambled to reduce risk. Those memories are fresh for some traders and that is raising caution flags.

It also raises the importance of the 7672 low as a major point of support and market direction. It will define the gap. If it is a common gap, it really should have been filled by now. If it is a runaway gap, well it had better start running. Most likely this gap is a breakaway and the larger fundametals of increasing demand and the tightening of supply should get the oil ball rolling leading to a solid rally.

With the US and the world adding much needed refining capacity, the demand for oil will be higher but signs that supply will be less. Bloomberg News reported 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. Yet on the other hand there are more signs that US oil production will struggle.

Dan Molinski from the Wall Street Journal write that, “Piper Sandler warns that US shale production risk is now skewed to the downside, pointing to a drop in rig-counts that could pressure frac spreads–the collection of equipment needed for a hydraulic fracturing job. “The US rig count is down 26 YTD,” it says, adding that while frac spreads are holding up better, this may be because public producers “are broadly operating on ‘maintenance mode’ [and] cannot afford to drop frac spreads and risk having their production profiles turn negative.” It adds that while blame for lower US oil production may be aimed at a “hostile” Biden administration, “the emerging trend is that the asset quality and depth of inventory of the US Oil industry is deteriorating.”

We’re expecting a pretty good draw in crude oil inventories even though the US strategic petroleum reserve released 1.1 million barrels last week according to SBR. The amount of oil of sour which is much more in demand was unchanged at 203.2 million barrels and the bulk of the release was sweet oil and supplies are at 163.7.

Oil guru Brynne Kelly points out that, “Shell is warning of tight supply of E 10 gasoline. The facts are that supplies are so tight that they might run out by Thursday. Maybe they should put wind turbines on their cars. Yet Europeans move to wind power to replace Russian natural gas is not going very well. Bloomberg is reporting that European efforts to rapidly scale-up offshore wind farms to help cut dependence on Russian natural gas and reduce planet-warming emissions are falling short as developers struggle to deliver projects.

Bloomberg reports that, “the prognosis comes after European leaders gathered in Belgium Monday to promote the promise of the North Sea in Europe’s low-carbon future. Nearly a year ago, Germany, Belgium, the Netherlands, and Denmark issued a declaration to speed offshore wind construction to reach 65 gigawatts of capacity by 2030, about five times the amount deployed today. The UK plans an additional 50 gigawatts of wind farms off its coast. “One of my worries is that we don’t move forward fast enough,” Errboe said in an interview. “We will miss our 2030 targets.” The nations are currently far behind. Analysts at Bloomberg forecast that the five countries will reach about 88 gigawatts combined by the end of the decade, about three-quarters of their stated goals.

In the short term today it is a big day for oil. If we hold Friday’s low, it will be a strong sign to get aggressively long as we get into the height of the summer driving season. Gas prices at the pump seem to be falling just a bit but whether or not we’ve seen the peak remains to be seen.

On the natural gas side weather is given us a pop as spring storms and wet weather in the Midwest is increasing demand expectations. It looks more like natural gas has hit bottom and it’s probably a good time to lock in those prices going into summer. We’ve seen the big pullback on crack spreads for both gasoline and diesel and probably a good time to put on those hedges.

Texas is looking to natural gas to cover the failures of wind and solar that led to the famous Texas winter blackouts. Bloomberg Is reporting that NRG Energy Inc. plans to build more natural gas-fired plants in Texas if lawmakers back a proposal to launch new payouts to generators as part of reforms to fortify its state against blackouts. The Houston-based independent power producer is “in the late stages” of developing projects that will add more than 1.5 gigawatts in Texas, spokeswoman Ann Duhon said in an email. These include a large gas plant and two smaller peaker units that are meant to ramp up and down quickly to react to swings in demand as well as solar and wind generation. NRG has about 11 gigawatts of gas, coal and nuclear generation in the state.

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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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