Fire And Rain. The Energy Report 05/17/2024

I’ve seen fire and rain and both of those could impact oil prices today. Massive rains in Houston have caused flooding and could impact oil production and potentially refining activity. While at the same time Canadian wildfires could threaten 2.1 million barrels of Canadian oil production a day in the worst-case scenario according to a report by Rystad Energy.

Fox Weather reported that the Houston metro area was rocked by severe storms that left 4 dead and over 1 million without power. They say that a storm system spawned severe thunderstorms in Houston Thursday, causing at least four fatalities and leaving more than 1.0 million customers without power across southeastern Texas. The oil market is going to watch very carefully as to what potential disruptions these storms might cause. Power outages reduce demand for electricity but at the same time it could impact refining operations and while we have no direct reports, we’re going to be watching the wire to see if there’s any that are reported.

We did see a big jump back up in the beleaguered gasoline crack spread yesterday in a signal to refiners they need to ramp up production of gasoline ahead of the Memorial Day holiday. In recent weeks gasoline demand has been disappointing to say the least but the bounce in the crack spread suggests that we could see a rebound soon.

This comes as we head into a weekend where the market is expecting the Fed to have some leeway to cut interest rates after we saw initial jobless claims yesterday come in stronger than expected and saw weakness in the Philly fed manufacturing number. Also a weakness and housing starts and building permits and while import prices came in a little bit hotter than expected, the market doesn’t believe that there is an increased chance of perhaps more than one interest rate cut before the end of the year.

Reports that China is making moves to stimulate its housing market is supportive to oil and gas. The People’s Bank of China effectively scrapped the nationwide minimum mortgage interest rate while cutting the minimum down-payment ratio to 15% for first-time buyers and 25% for second homes, according to a statement on Friday. The previous ratios stood at 20% and 30%, respectively according to Bloomberg News.

Reuters is also reporting that China’s industrial output grew by 6.7% year on year in April as recovery in its manufacturing sector gathered pace, accelerating from the 4.5% in March and pointing to possibly stronger demand for oil to come.

All this signals that the recent correction in oil as well as the crack spreads should be nearing the end. We know that gasoline demand is being impacted by the consumers being hit with inflation pressures. There are signs that we could be turning the corner with weakness in manufacturing data that has helped ease some of the tightness in the diesel product market. And if the damage in Houston to refineries is small, we would expect to see big draws in crude oil inventories in the next few weeks. While the correction may try to retest if we get bad economic news from these levels, we feel that the risk on the downside is a lot less than the potential risk on the upside.

We are also seeing stronger demand for natural gas because, gosh darn it, low prices sometimes start to cure low prices. Gas prices are up over 43% with renewed hopes that liquefied natural gas exports will pick up and production will level off. While we did see some signs of production leveling off, it did bounce back. Yesterday the Energy Information Administration reported demand for natural gas for electricity generation hit an all-time high in January. The United States power generation from natural gas has risen over the last 2 years and most likely will again this year. And we’re starting to see some hope in the storage numbers, we may be whittling down the massive inventory as the EIA reported a smaller than expected increase in storage. They said that, “Working gas in storage was 2,633 Bcf as of Friday, May 10, 2024, according to EIA estimates. This represents a net increase of 70 Bcf from the previous week. Stocks were 421 Bcf higher than last year at this time and 620 Bcf above the five-year average of 2,013 Bcf. At 2,633 Bcf, total working gas is above the five-year historical range.

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