Hard Landings. The Energy Report 01/03/2024

The oil spike up and subsequent reversal shows the market was more concerned about a hard landing in the economy than was about the significant risk to oil supply and transit. Even after reports that shipping giant Maersk Hangzhou, after one of its container ships was attacked, decided to pause all transits through the Red Sea and oil retreated. It previously surged on reports of the attack even after the US sank the boats of the Iranian-backed Houthi attackers. Petro reversed course on a rejuvenated dollar index, driven with a surge in Bitcoin that has been soaring on safe-haven buying. Add to that a shaky performance by the stock market that is raising concerns that perhaps the feared Biden recession has begun.

The economic data seemed to suggest that the economy is contracting at a faster rate than previously reported. Not only did the Atlanta FED lower the US GDP growth estimate for the fourth quarter to  2.0% from the previous estimate of 2.3%, we saw other disappointing data as well.

Yes, November construction spending was up by 0.4% in November to $2.04 trillion but it was still a big miss from market expectations of a 0.6 increase. Yet more disturbing was a sharp drop in US manufacturing. The S&P Global manufacturing PMI fell to a weaker-than-expected and revised lower reading of 47.9 in December as new orders plummeted.

The market also seemed shaken by a Gas Buddy Report by Patrick DeHaan that gasoline demand, according to their figures, collapsed to 7.81 million barrels a day or down 12 percent over the weekend. While it was a holiday weekend and weekly numbers are volatile, a drop like that could signal that consumers are struggling. And based on polls about the economy, that does not bode well for the Biden administration.

Mike Shedlock at MishTalk.com, points out that “although wages are up 21.9 percent in nominal terms, real wages are down 2.5 percent in the last two years. Is it any wonder why Americans feel like the world is moving in the wrong direction?

Yet while the recession fears are real in the near term, the reality is the risk to supply is still high. Oil rebounded off of overnight lows after Libya’s Sharara Oil Field started a full shutdown after protests.

We should see a significant drawdown in supply this week as the American Petroleum Institute (API) has to play catch-up to the Energy Information Administration. We expect crude supply could fall by 3 million barrels and products by 2 million barrels.

And while demand concerns kept the market down, crack spreads are solid with diesel cracks in the lead today. China’s demand should stay strong after it increased its export quotas by 60%.

While the recession concerns are real, in the short term supply and demand look to be very solid. If you look at the last four weeks we should see drawdowns in inventories and that should keep the market from falling too far. We should get a bit of a rebound today but if we continue to not follow through on rallies, it’s a clear sign that the market expects recession.

Natural gas started strong but pulled back on weather speculation. Globally on gas, we have seen cold weather in Asia but not everywhere. John Kemp writes that Northwest Europe experienced a much warmer than normal December. Temperatures in London were +2.3°C higher than the long-term average while those in Frankfurt were +2.8°C higher. Persistent warmth lowered gas consumption and contributed to the increasing seasonal storage surplus.

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Thanks,

Phil Flynn

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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