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
Currently Unwilling. The Energy Report 04/27/2023
I guess you could yell fire in a crowed movie theater or refuse throw a life preserver to a drowning man. Or maybe just say that the US government is unwilling to intervene on First Republic. Just forget about basic laws of supply, that for petroleum came in lower than expected. Or demand that came in better than expected. Focus instead on the bank fear liquidation play. Oil filled the 7583 gap on the headline that the government was unwilling to step in and save First Republic, at least at this time. The energy markets tried to recover and focus on the Energy Information Administration supply (EIA) report that showed petroleum supplies in every major category below average and demand in every category above a year ago. Not only that, a big weekly jump in gasoline demand that suggests that recent demand numbers may have been understated.
What we do know is that when the banking sector looks wobbly, it is always a risk-off event for oil. We saw that of course in 2008 and most recently with the failure of Silicon Valley Bank. We saw a big jump in volume on the sell-off and it was a headline late in the day that sealed the oil market’s fate. We saw oil plunge on a big spike in volume that suggests that someone with a large position had to get out. There was a report that the FDIC was planning on limiting the banks’ ability to borrow more money from the Fed window and limit Fist Republic access to Fed facilities. That is like taking a tab away from a drunk at a bar. It is not going to be pretty. And if the government is currently unwilling to step in, does that mean that depositors at First Republic that have funds over the $250k FDIC insurance level are not going to be protected, assuming they haven’t moved their money already. If they have not, they had better. So, if they let First Republic fail and allow some depositors to lose money, is that a mini-Lehman moment. Ok, maybe a mini-micro-Lehman moment. We know that last month Republicans in the House of Representatives freedom caucus vowed to oppose any universal federal guarantee on bank deposits above the current $250,000 limit.
Regardless, does the market action in oil that was divorced from the bullish fundamentals that we will get into in a bit, again inspire OPEC Plus to cut production? We know that OPEC did not stand for the last banking crisis sell-off, will they cut again?
Well so far not yet at least according to Russia’s Alexander Novak Deputy Prime Minister of Russia. Mr. Novak is saying that OPEC plus sees no need for further oil production cuts despite lower-than-expected Chinese demand. Mr. Novak also says that, “we don’t see oil market deficit after the OPEC plus cuts starting from May.”
Yet despite talk about weaker demand in China and confidence that we would see a supply deficit, the EIA Status report, if current trends continue and we don’t have a major recession, suggests otherwise. There has been some talk of gasoline demand disappointments. Yet the EIA seemed to dispel those concerns. The EIA showed that gasoline demand surged higher by 992,000 barrels a day hitting 9.511 million barrels a day. If you look at the four-week average gasoline demand is up 3.9% over year ago levels.
Total US petroleum demand was back up to 20.208 million barrels a day and based on the four-week average is 2.2% above year ago levels. Diesel demand was also solid as distillate fuel product supplied averaged 3.9 million barrels a day over the past four weeks, up by 4.8% from the same period last year. Jet fuel product supplied was up 3.3% compared with the same four week average a year ago.
Supplies on the other hand are below normal. The EIA reported U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by a massive by 5.1 million barrels from the previous week. At 460.9 million barrels, U.S. crude oil inventories are about 1% below the five-year average for this time of year. Keep in mind that SPR supply is at the lowest level since 1983 and are a whopping 186 million barrels below year ago levels. Total motor gasoline inventories decreased by 2.4 million barrels from last week and are about 7% below the five-year average for this time of year. They are 10% below the ten year average. Distillate fuel inventories decreased by 0.6 million barrels last week and are about 12% below the five-year average for this time of year.
So we have a situation where oil demand has not been impacted by banking woes dramatically but are moving on fear that they may happen in the future. If oil goes south, I think OPEC will act. If the banking worries calm down again, then we will go back to focusing on supply and demand. In other words the downside should be limited but it may take a few days for the market to settle down. We are not trading oil for a few days; we will be trading fear.
Fear of climate change is causing more regulations that will bury the poor and middle class. Robert Roper emailed me about his concerns that in Vermont they are going to pass a bill that is will turn out to be a big tax hike on folks heating and electricity bill.
Rob write that, “Vermont is set to pass a Clean Heat Standard (S.5) for thermal sector heating fuels, which includes space heating, water heating and cooking. This law was described perfectly by Sen. Dick McCormack as a “Rube Goldberg” carbon tax. Estimates by our Secretary of Natural Resources put the additional cost per gallon of oil, propane, natural gas, and kerosene as around 70 cents per gallon. Other estimates put it as much as $4.00 per gallon. The CHS, they say, is required under Vermont’s Global Warming Solutions Act which requires the state to meet some rather draconian greenhouse gas reduction mandates by 2025, 2030 and 2050. To meet the thermal sector fraction of these mandates, 90,000 homes would need to be weatherized by 2030, 140,000 heat pumps would need to be installed, 120,000 water heaters, etc… The trained labor force in Vermont to do this work on this timeline does not exist by a long shot. It’s insane.
The way the CHS works is that any fuel dealer who brings heating fuels across the state line for sale or consumption in VT becomes an “obligated party” required to retire a certain amount of “Clean Heat Carbon Credits” reflective of the amount of CO2 emitted into the atmosphere by burning that fuel. These carbon credits will be generated by literally tens of thousands of actors across the state performing “clean heat measures” (CHMs). There are 12 specific CHMs identified in the bill, but the big ones are weatherization, installing cold climate heat pumps, and heat pump water heaters. Once completed, ownership of credits needs to be established and a market-exchange needs to be established to allow the obligated parties to buy them. This will be insanely complicated. Insanely complicated is what the government is good at.
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