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
The overbought oil market took its eyes off the fundamentals as those old banking stability concerns crept back in. Oil historically performs miserably when bank solvency issues arise and while petroleum mostly shook off the liquidation of China’s massively in-debt real estate developer Evergrande, when the issue hit closer to home, the hedge funds took notice.
Oil reversed gains quickly as word spread of a crash in the share price of New York Community Bancorp which was well over 44% before recovering to be down 38% Wednesday, closing at $6.47, its worst day on record according to the Wall Street Journal. The irony of the situation is that New York Community Bancorp was one of the institutions that acquired assets from Signature Bank, one of the banks that failed in 2023 after California’s Silicon Valley Bank started a run-on regional bank and a run on the oil market.
In March of 2023 when the Silicon Valley Bank failure started to unravel, we saw oil trade lower but in hopes it would be contained and traded as high as $8353 in April 2023. Yet as banks tightened their belts the oil market lost liquidity and recession fears caused oil prices to crash until it finally bottomed out in May of 2023 at $6364. Oil did recover because ultimately the fundamentals for oil were still very good and because the economy did not crash after the failure of other regional banks as well as the downfall of the once mighty Credit Suisse. The oil trade Is sensitive to these developments because it can have a major impact on demand. And with the banks still holding on to massive risk from real estate, it’s causing concerns about the health of the overall economy.
These banking concerns hit the oil market on the same day the Federal Reserve kept interest rates unchanged and happened to remove the line that, “The U.S. banking system is sound and resilient” in the Fed Statement. Now today Bloomberg is reporting that Japan’s bank Aozora lost 20% of its stock value and was tied to US property losses. That sent shares to limit down and raised concerns about the global bank’s exposure to bad real estate bets.
Still, oil is gaining its footing this morning because the fundamentals for oil are still very strong. Not only were the weekly oil inventories very supportive in real terms and on a seasonal basis the fact that the Energy Information Administration once again had to readjust higher their previous demand numbers suggests the potential for a significantly tightening oil market in the coming weeks unless the banking crisis brings us down.
The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.2 million barrels from the previous week. At 421.9 million barrels, U.S. crude oil inventories are about 5% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.2 million barrels from last week and are about 1% above the five-year average for this time of year. Both finished gasoline and blending components inventories increased last week. Distillate fuel inventories decreased by by 2.5 million barrels last week and are about 5% below the five-year average for this time of year. Total commercial petroleum inventories decreased by 9.6 million barrels last week.
Part of the reason that we saw an increase in crude oil supplies was because exports were down due to the cold weather. On top of that, even with the exports being down because of adjustments, we could have seen supplies fall by 900,000 barrels instead of rise. That was pointed out by oil watcher Patrick Bourque.
Interestingly, weekly gasoline demand blew away expectations. Gasoline demand rose by 264,000 barrels a day to 8.147 million barrels a day. Not bad for parts of the country where we’re afraid to go out in the cold. Some drivers of electric cars that did go out in the cold found that their battery life disappeared. Yet the Energy Information Administration did want to point out to those who believe that we can switch to electric cars that there can be hope. They pointed out that, “Combined sales of hybrid vehicles, plug-in hybrid electric vehicles, and battery electric vehicles (BEV) in the United States rose to 16.3% of total new light-duty vehicle (LDV) sales in 2023, according to data from Wards Intelligence. In 2022, hybrid, plug-in hybrid, and BEV sales were 12.9% of total sales. But before you get excited about the electric transition, Bloomberg is reporting that Volvo will no longer extend funding to its loss-making electronic vehicle maker Pulsar and may distribute shares to other shareholders to focus on Volvo’s own ambitions. I guess their own ambition is making cars that somebody might actually want to buy.
While the fundamental picture for oil extremely bullish, for this time of year the key will be whether or not the market can shake off the concerns about the global economy. So far the banking fears have not hit up on the demand side and with the rising geopolitical risk, we could still see some major price spikes. We’ll watch to see if the market feels that this banking crisis will not start a domino effect that will push the globe into a major recession or raise fears.
On the flip side, if banks start seeing their shares get obliterated and it seeps into the overall market psychology, we could see a drop in oil prices. If the stock market seems to shake off these concerns then oil prices will once again be on guard for a significant price increase. Yesterday Jerome Powell said that the Fed had to be convinced that inflation was on target to get down to their 2% rate before they decided to start cutting interest rates. So the Fed will be watching oil prices closely because the biggest risk to a spike in inflation is the extremely tight global oil market and add to that the possibility of a conflict could send these prices soaring. No wonder the Fed is losing sleep at night.
In yesterday’s Energy Report, I pointed out that Russia was very confident that they could continue to sell their oil and they didn’t have to offer such a large discount because sanctions on Russia have failed. So it’s very interesting that later that day after I wrote that report, Javier Blas from Bloomberg pointed out that even though Biden had an executive order 14066 that banned the import of Russian crude oil the US according to EIA imported 333.000 barrels of oil from Russia last month. So I guess that means we’re funding both sides of the Russian-Ukraine war. Maybe the Biden administration may be colluding with Russia. Or maybe he is just a war profiteer. Just make sure the big guy gets his 10%. Just kidding. Later Javier Blass clarified it saying that the oil was shipped from Russia to the Bahamas before March of 2022 when the US banned Russian import so technically it was excluded from the ban after 18 months in storage. Yet the Chinese Russian oil laundering scheme continues.
Natural gas prices are trying to recover on the possibility that we could get another blast of winter in a couple of weeks. The selling of natural gas seems to have eased after the big spike after the polar vortex. Yet consumers in parts of the country are still going to be paying the price. In Colorado, natural gas prices could be going Rocky Mountain high as Xcel Energy is asking to raise its base rate to sell natural gas by 9.5% because of the cost of Winter Storm Uri. Better be leaving on the jet plane if you don’t want to see those higher prices kick in after winter. Yet t if we don’t see price increases for natural gas a lot of producers and providers are going to have big problems.
Biden’s pause on LNG Terminals will not help CO2 emissions. India will start operating new coal-fired power plants with a combined capacity of 13.9 gigawatts (GW) this year, its power ministry said in a statement to Reuters, the highest annual increase in at least six years. Prime Minister Narendra Modi’s government has cited energy security concerns amid surging power demand and low per-capita emissions to defend India’s high dependence on coal. Power generation in 2023 increased by 11.3%, the fastest pace in at least five years.
In the agricultural market, we’re seeing some incredible stories. The US cattle herd the lowest it’s ever been since the 1950s and we are seeing a record for a soybean crush. The Department of Agriculture reported that the US cattle herd fell to the lowest level since 1951. It is the fifth year in a row that cattle inventories fell. Weak prices for soybeans give them increasing demand. Wheat futures could be ready for a massive turnaround if we indeed get this polar vortex that people are talking about. It’s the winter wheat crop that will be extremely vulnerable because of the lack of snow cover. All these upside risks for commodities against the backdrop of an oil market that is very bullish could lead to another spike of inflation in the coming months.
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