Oil Apprehension. The Energy Report 03/20/2024

Oil apprehension is growing after the front month WTI hit the highest price since last October as expectations of supply deficit start to get priced in as more are predicting a potential peak in US oil production.  Yet a not-so-bullish American Petroleum Institute (API) report and high anxiety ahead of today’s big FOMC meeting are causing a bit of a pullback in oil and a drop in diesel cracks is raising some demand concerns.

The API, while not bearish, did not live up to the whisper market expectations heading into the report. The API did show a larger-than-expected 1.519-million-barrel draw, but there was some talk of a much larger draw. We were looking for 3.0 million which may still happen in today’s Energy Information Administration (EIA) report at 9:30a central time but it might not matter if the Fed starts to back off rate cuts as the market has priced in. The API also reported a 1.574 million barrel drop in gasoline supply which is a much smaller drop than last week but not scary enough to drive the crack spread. The diesel crack is under pressure as the supply shortage has eased a bit with a slight increase of 512,000 barrel in the weekly API. John Kemp at Reuters pointed out that hedge funds started to cover positions with the combined position in U.S. diesel and European gas oil down to 55 million barrels from 87 million five weeks earlier.

In today’s EIA report there will be a focus on the demand numbers partly due to an adjustment in how the EIA counts production. The amount of production fell to 13.1 million barrels. Last week the EIA said that their crude oil production estimate incorporates a re-benchmarking that decreased estimated volumes by 177,000 barrels per day, which is about 1.3% of the production total. Yet in a world of growing demand and underinvestment in supply, the longer-term outlook for US energy production is going to become more critical.

S&P global reports that ConocoPhillips CEO Ryan Lance at the CERAWeek by S&P Global conference said U.S crude oil production growth in 2024 will likely drop to about 300,000-400,000 b/d in 2024, down from around 1 million b/d in 2023. S&P Global is also reporting that oil product stocks jumped to an 8-month high amid Ramadan. They put the Middle East crude runs to exceed 9 mil b/d for the first time. Total inventories are up 16% since end-2023. Stockpiles of oil products at the UAE’s Port of Fujairah jumped 10% to an eight-month high in the week ended March 18, with regional demand for some products typically slowing during Ramadan observations, according to the Fujairah Oil Industry Zone and historical data. Total inventories increased to 20.049 million barrels as of March 18, the highest since July 10, the FOIZ data published March 20 showed. Stockpiles have increased 16% since the end of 2023.

The Fed worries have slowed momentum, but the underlying outlook is bullish. After the Fed fallout, look for spots to buy.

Natural gas is headed towards a glut but in the big picture could natural gas hit $800. Bloomberg News reports that, “The chief of the largest US producer of natural gas has warned that a lack of pipelines and storage facilities will trigger dramatic price swings in the years ahead, causing them to surge as much 350%. He said, “Gas demand in the US has jumped 50% since 2010, while pipeline and storage capacity have increased just 25% and 10% respectively, EQT Corp. Chief Executive Officer Toby Rice said during an interview at the CERAWeek by S&P Global energy conference in Houston. That leaves the market prone to wild price swings, ranging from today’s level of about $1.75 per million British thermal units to as high as $8, Rice said. “This is the world we live in unless we get serious about getting more infrastructure built,” said Rice, whose company last week agreed to buy Mountain Valley Pipeline developer Equitrans Midstream Corp

Rice is a long-standing and vocal critic of the US regulatory framework and permitting process that he says holds up the construction of new pipeline infrastructure. In November, he warned that a pipeline crunch threatened to trigger an energy crisis. Rice also said in December that falling prices would lead to a slowdown in drilling and that prices were well below the break-even cost of production.

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