Strategic Options. The Energy Report 05/04/2023

The scariest statement for oil traders these days is “we are exploring strategic options including a sale.” That statement, released conveniently by PacWest Bancorp after Fed Chairman Jerome Powell had his post interest rate decision press conference and shortly after the 4 pm central time pause for oil, left little time for the market to react. On the 5 pm central reopen, the news caused flash crash or a chump dump in oil, as the market acted like someone had to liquidate in a hurry leading to speculation that some oil trading or physical operations may have had their bank line pulled or perhaps just a forced liquidation due to a margin call.

Regardless of that situation, it makes you wonder if Fed Chairman Jerome Powell had any idea in his press conference after the Fed signaled that after this rate hike, they would most likely go into pause mode unless inflation data gets crazy, knew that this Pac West was going to make the same type of announcement that Silicon Valley Bank, Signature Bank and First Republic made right before they failed. Now reports that Toronto-Dominion Bank and First Horizon Corp. have agreed to terminate their merger agreement, is raising even more concerns about global bank stability.

Now the question becomes how much money does will it take for Jamie Diamond to keep buying the remnants of these banks. In fact, the list of regional banks that may need a bailout is growing by the day raising concerns whether the Fed or the Biden administration has the ability to keep this unwinding crisis contained.

One would think that the Fed signaling a pause would have been a cause for an oil market celebration yet now the market sees this as a sign that the Fed has already made another misstep that could turn our inflation crisis into a full-blown economic crisis or worse the dreaded 70’s stagflation. 

The other problem for oil was the Energy Information Administration (EIA) status report seemed to suggest a more bearish outlook from the previous days very bullish American Petroleum Institute (API) report. The biggest bearish head-scratcher was the huge drop in weekly gasoline demand that fell from 9.511 million barrels a day to 8.618 million barrels a day. More than likely the data is incorrect, but it did raise concerns that consumers are struggling even as the ADP job data showed healthy job increases and recent strength in consumer confidence.

The EIA data on the supply side was supportive, just not as supportive as the API the day before. Now add in banking turmoil and the market ignored the bullish aspects of the report.  Demand in the four week moving averages is still impressive.

For those who did not see it the EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.3 million barrels from the previous week. At 459.6 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.7 million barrels from last week and are about 6% below the five-year average for this time of year. Finished gasoline inventories decreased, while blending components inventories increased last week. Distillate fuel inventories decreased by 1.2 million barrels.

On the demands side, total products supplied over the last four-week period averaged 19.6 million barrels a day, up by 1.7% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 8.9 million barrels a day, up by 1.1% from the same period last year. Distillate fuel product supplied averaged 3.8 million barrels a day over the past four weeks, up by 0.2% from the same period last year. Jet fuel product supplied was up 1.0% compared with the same four-week period last year.

The other concern is China’s economy will experience a decline in productivity. Investment in the medium term that’s from the International Monetary Fund which just last week actually raised their economic outlook for China.

In the meantime, the mission by the Biden administration to force electric cars down our throats is failing. Dan Molinski wrote that, “exclusively on Dow Jones Newswires that Ford says it sold 3,499 electric vehicles in April, a 25% drop from April 2022, while overall auto sales rose by 4% driven by strong sales of traditional, fossil-fuel-consuming vehicles. However, year-to-date 2023 EV sales are still up 16%. Sales of Ford’s showcase EV, the Mustang Mach-E fell by 58% year-on-year in April, while gasoline-powered Mustang sales rose 18%. “The glut of EVs is getting scary for auto dealers as well as the price war that Tesla initiated,” says Louis Navellier of money management firm Navellier. “Ford lost $722M in 1Q on its EVs, so if a legacy auto manufacturer cannot make money in EVs, it may be next to impossible for startups, like Rivian and Lucid.”

Natural gas is trying to bottom, and it may depend on today’s EIA report. We expect a 55 bcf injection into storage.

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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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