Inflation Proof. The Energy Report 02/14/2024

Somehow oil and petroleum products become Inflation-Proof when the supply side starts to drain. The consumer price index came in hotter than expected at 3.1% in January. The core rate came in at 3.9%, excluding food and energy also came in hotter than expected. That caused a surge in the dollar as traders readjusted their bets on an interest rate cut. That caused many commodities to fall but it seemed like oil for the moment oil was inflation-proof. This market action should be bad news for the Biden administration that is running out of options to subdue prices and that will become a major issue in the presidential election.

While the upward surge in oil may have slowed a bit after the report, it held up better than commodities like gold and silver and the stocks tanked supply-side reality. In the recent past, hot inflation data moved oil lower as the perception was that the Fed would be forced to slow the economy and slow the oil demand. Yet now with oil demand on track to break records and time-spreads suggesting tightening global oil supply, there is a shortage of oil.

Not only did we see product supply plunge in yesterday’s American Petroleum Institute (API) report, we are also seeing signs of tightness in global oil markets based on the pricing structure. The API showed that crude oil supply jumped by 8.52 million barrels as the Whitting Indiana refinery outage and exports impacted that build. Yet the massive 7.23 million barrel drop in gasoline supply is becoming an issue. We also saw distillate fall by 4.016 million barrels.

John Kemp at Reuters pointed out that the WTI oil futures calendar spread for March-April 2024 surged into a backwardation of 31 cents per barrel on February 13, the highest for more than three months. Traders are looking past the temporary shutdown of BP’s Whiting refinery and anticipate inventories around the NYMEX delivery point at Cushing will start depleting again causing a renewed squeeze on deliverable supplies.

Donald Trump can’t stop the energy transition, John Kerry told the International Energy Agency that on Tuesday. He claimed that even when President Trump was there for four years, 75% of our electricity came from renewable new electricity because we had  in 37 states that required the deployments of renewables. So whatever happens, that’s not going to change the direction we’re moving in Kerry said adding that the green revolution was happening notwithstanding the hiccup of the farmer strike or the President of the country who wants to pull out of the Paris agreement.

Natural gas continues to plummet. EBW Analytics wrote that, “Deteriorating bullish hopes for late February cold are exposing NYMEX futures to steep fundamental downside. The entirety of recent losses is justified on a medium-to-long term basis-and natural gas may still have further to fall.  The NYMEX front-month at $1.689 reached historically cheap levels seen only twice in the past 25 years. On an inflation-adjusted basis, it is possible that prices could even fall below pandemic-era lows before the end of the week. A growing speculator’s short position may represent ammunition for prices to skyrocket if bullish catalysts emerge. The more likely outcome, though, is for prices to grind lower as storage surpluses add 150 Bcf in the next two weeks.

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