Losing The Charge. The Energy Report 02/28/2024

While OPEC signals to the market that their production cuts will be extended and signs that Chinese oil demand will continue to rebound, today the market is pulling back on a rising dollar as the market tries to assess the timing and the quantity of potential Fed Rate cuts. This comes as the American Petroleum Institute (API) reported a large 8.428-million-barrel crude oil increase due to refinery outages and maintenance, but a worrisome 3.272 million barrel drop in gasoline supply as well as a 520,00 drop in distillate is putting product supply further below average and sending pump prices higher.

The ongoing problems at the Whiting, Indiana BP refinery are being felt causing more inflationary pain to those on a fixed budget. Oh Wait! I forgot, Transportation Secretary Pete Buttigieg suggested that it’s probably their fault for not buying an electric car. Probably not a good time to bring that up as Apple abandons its plans to build an electric car as it becomes clear that the so-called electric car transition was never based in reality or science and they are better off focusing on Artificial Intelligence which really will transform the economy and environment better than throw away electric vehicles that are dirtier to produce and are too expensive to fix or replace the batteries.

This comes after the Biden administration changed the emission rules to back off the previous push towards electronic vehicles. Part of the problem is Americans do not want the car. Even democrats love their internal combustion engine as it appears that most of them don’t want to buy electric cars. So I guess it’s back to focusing on the realities of oil where the green energy pipe dreams have led to underinvestment leaving a larger future supply gap as well as replacement and decline rates will not be replaced.

Yet today that’s a problem for another day as the market focuses on the dollar and the bond market. This week we get a ton of data. Today we get the GDP as well as the Energy Information Administration (EIA) Petroleum Status Report. Inflation data is going to be key as the market tries to assess the Fed’s next move and when they get the scissors out to start cutting the rates.

We look at the oil market right now and the backwardation in the market seems to suggest a very tight oil market with considerable upside risk. We expect that OPEC will not only follow through with their extended cuts through the end of the year including their voluntary production cuts but they may even suggest that producers that had overproduced their quota will make up for it over the coming months. In OPEC’s mind, they feel they need to have some spare production capacity available if geopolitical events cause a major oil price disruption.

The oil market is also playing down talk that there could be a potential ceasefire between Israel and Hamas in the Gaza Strip. Israeli Prime Minister Netanyahu said he was surprised by Biden’s comments on the possibility of a ceasefire in Gaza by Monday. That comes after Qatar also seemed confused by Biden’s statement. Maybe he knows something they don’t know or maybe he doesn’t know anything. You are the judge.

Supply tightness of products is also becoming an issue with the deep backwardation in Brent crude. It’s clear the market is concerned about very tight supply pressure from refiners to meet distillate demand and that should keep gasoline inventories tighter than normal.

Natural gas production is falling but not fast enough to avert a historic glut. Natural gas production fell to 101.7 according to Woods McKenzie and that’s down 2.3 BCF from the week before. The pain in the natural gas industry is being felt and we’re assuming there’s going to be some bankruptcies and some major cutbacks very shortly.

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