No Mood to Celebrate. The Energy Report 05/16/2023

The International Energy Agency (IEA) is predicting that global oil demand will hit a record 102 million barrels a day, but oil is in no mood to celebrate. Even though the IEA once again had to raise their demand growth forecast by 200,000 barrel a day, meaning that demand will grow by 2.2 million barrel a day, and the fact that the Biden team is starting to refill the emptied SPR, the market continues to focus on negativity like banking instability and worries about the debt ceiling and mixed economic data in China.

China, of course, is leading the global demand resurgence along with India and the rest of Asia. Oil prices seem to fret this morning when it was reported that China’s industrial output increased by 3.8% month over month and grew 5.6% in April from a year earlier, yet fell far short of juiced up market expectations of a jump over 10% year over year.

On the oil demand side China is telling a different story. A story more in line with the IEA projected record-breaking global demand. China’s oil hit a record in in March,  hitting 16 million barrels a day. China’s oil refinery throughput in April surged by 18.9%, the second highest on record which would suggest that the April data on Chinese industrial output may not be missed so much as delayed to this month. I highly doubt that China is refining at that rate just to export or put it in storage. Refinitiv Oil Research reported that May crude imports by China are close to 11 million barrels per day (bpd), versus 10.67 million bpd in April.

Yet the oil market is still worried that with the Fed failing to stop banking failures and the Biden team wanting to raise taxes to lower the deficit as their salvo to avoid a debt default seemingly oblivious to the fact that if you raise taxes during a recession, you will bury the economy. Biden’s anti-growth, anti-capitalistic, anti-fossil fuel agenda, has hurt the economy and has hurt economic growth. It has also helped feed inflation. The Biden administration continues to tell us there is something wrong with capitalism, individualism and entrepreneurship. These are the very ingredients that have made the US economy one of the strongest in world history.

The Biden team especially despises the US oil and gas industry and their workers that have led the energy revolution as it produces oil and gas cleaner than anywhere in the world. Yet the Biden team sees that noble industry as price gougers and war profiteers. Instead they want to put us on a path of ever-growing deficits and record government spending but squeeze big and small business slowing their growth. They want to go back to the Carter policies that led the country into stagflation and destroyed the spirit of the nation.

Oil prices also must start pricing in the fact the US is going to have to replace all the oil that the Biden administration released into the market. The U.S. Department of Energy announced late yesterday that it will purchase 3 million barrels of crude oil for the Strategic Petroleum Reserve for delivery in August and asked that offers be submitted by May 31. Now if the plan is to buy back 3 million barrels a month it will take about 5 years to replace the 180 million barrels.  And it’s clear that it is unlikely that the Biden team will be able to buy oil below $70 a barrel unless they cause a recession. Maybe that is why they want to raise taxes. Oh, the funny thing is that the SPR released 2.4 million barrels of oil last week due to a congressionally mandated sale. Don’t you just love Washington? Makes a lot of sense!

Diesel prices are on a tear as well which does not fit the woe is me oil demand story. John Kemp at Reuters points out that the U.S. diesel crack spreads for December 2023 have firmed to €191 per ton on May 15 up from a recent low of $172 on April 28. Inventories have tightened despite the weakness in the industrial business cycle.

Again, wherever you look inventories are tight. Prices are subdued in part because of increased global refining capacity and a sense of coming economic doom. The market action seems to be a vote of no-confidence in the Biden administration and the Fed and their ability to guide our economy forward. I am concerned that the way the market is ignoring data that suggests that we will see a supply deficit, could lead to a damaging price spike later this year.

And how are the toughest ever sanctions on Russia going that the Biden team touted? Well not as well as you might think. It seems that there are ships moving Russian oil and disguising its origin and may very well be ending up in the US and Europe. Even the FT is reporting that, “The European Union (EU) should crack down on India reselling Russian oil as refined fuels including diesel into Europe, the bloc’s chief diplomat has said, as Western nations move to tighten sanctions on Moscow’s energy sector, the media reported. Josep Borrell, the EU’s high representative for foreign policy, told The Financial Times that Brussels was aware that Indian refiners were buying large volumes of Russian crude oil before processing it into fuels for sale in Europe, saying for the first time the EU should act to stop it.” Good luck! Hope you have better luck enforcing that as the Biden team does on enforcing oil sanctions on Iran.

Petro-Logistics is also predicting that Saudi crude oil exports are going to fall in May after rising 470k in April.

The US petroleum inventories that we will get our first glimpse of tonight with the release from the American Petroleum Institute (API) should tighten further despite the 2.4-million-barrel SPR release.  I am projecting a 2-million-barrel crude oil draw. Gasoline supplies already near record lows should tighten further falling by 3 million barrel and distillates down by 2 million barrels.

Natural gas had a nice rally helped in part by signs that US producers are reducing rigs and wildfires in Canada. The charts are looking more like we finally hit bottom. Upside will depend on weather.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

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