OPEC’s Little Taper Tantrum. The Energy Report 06/04/2024

Somewhere, Former Fed Chairman Ben Bernanke may be smiling. It seems OPEC has created its own little taper tantrum causing the massive sell off in the price of oil and products and raising concerns about the broader strength of the global economy. Oil fell over 2% this morning, hitting the lowest level since February after OPEC failed to convince the market that their tapering off voluntary cuts was going to be data dependent.

So many times, the price of oil seems to be a barometer for the confidence of the global economy and after OPEC laid out the possibility that they may start to have an exit strategy from voluntary production cuts, the market has not been pleased. It hasn’t helped of course that here in the US we have seen some surprising crude builds in oil inventories over the last couple of months but now we may have an answer as to why that has happened.

Part of it has been subpar gasoline demand but also it has been because Venezuela was dumping oil and products ahead of the reimposition of US sanctions going into place. The Biden administration lifted sanction on Venezula, in return the Maduro government promise to hold a free and fair election. After the Maduro government failed to live up to its commitment of holding a free and fair election (I know you are shocked), the Biden administration had no choice but to reimpose sanctions that were supposed to start June 1st. So, Venezuela jumped to oil as fast as they could, causing their exports to rise over 30% last month.

Reuters reported that a total of 50 vessels departed Venezuelan waters last month carrying an average 708,900 barrels per day (bpd) of crude and fuel, and 614,000 tons of petrochemicals and oil byproducts, according to internal PDVSA documents and shipping data from financial firm LSEG. The volume of oil shipped in May was 30% larger than in April, and 7% above the same month a year earlier. Exports of petrochemicals and byproducts were the highest in 13 months, the data showed.

While the market frets about a potential exit strategy of some of the OPEC production cuts, we are going to get a cut from Venezuela’s exports that should start showing up in the data in June. It’s possible that Venezuela exports could be cut in half after the sanctions reducing exports to about 354,000 barrels a day and it could be even worse if the Biden administration decides to really enforce these sanctions.

Of course, the Biden administration’s record of enforcing sanctions, judging by what’s happening with Iran, hasn’t really been promising.

As the shakedown in the oil market seems to be spreading to other commodities, we’re seeing pressure built in things like copper and silver and some weakness in the Dow Jones futures this morning as well as the S&P. Brent crude breaking down below 80 is significant from a psychological viewpoint and it raises concerns that the drop in price is signaling something more ominous to the market. Of course we believe the market got the wrong signal from OPEC just like Ben Bernanke when he first started to talk about tapering it caused a big shake up in the market because people reacted more to the punch bowl being taken away as opposed to the reality that the market was probably justifying that it was time for the Federal Reserve to start tapering back on bond purchases.

It may take a day or two for the oil market to realize that they are overreacting to this news, but the real true test of course will be oil inventories tonight we get the American Petroleum Institute report and if the whisper numbers are correct, we should see a substantial drop in the crude supply number.

But the key thing will be demand. Gasoline demand has been erratic to say the least and even when we saw the report on consumer confidence rising last week, the true test of consumer confidence may be in the gas tank. Are consumers cutting back on gasoline purchases because inflation is getting more ominous at the same time consumers are going to be hit with higher taxes.

In the meantime, the Biden administration announced that 3-million-barrel buyback for the Strategic Petroleum Reserve. While they may say that they made money by selling high and buying it lower, the reality is the use of the reserve for political purposes should never happen again.

The government intervention in the market to try to control gasoline prices is simple market manipulation. It does longer term damage to the market. If the government is going to get involved in the market on a regular basis it can discourage investment in refining capacity and oil production. The normal market mechanisms can be impacted. The SPR shouldn’t be used to get a couple of cheap political approval points.

On the product side, Mother Nature has bailed out the diesel market and that has helped demand fall to multi-decade lows.

Reuters reported that, “U.S. diesel demand fell to its lowest seasonal level in March since 1998, while crude oil output rose to a multi-month high, data from the U.S. Energy Information Administration showed on Friday. Demand for distillate fuels, which includes diesel and heating oil, has been hit sharply this year under pressure from sluggish manufacturing activity, milder-than-expected winter weather and booming renewable fuel supply.

While petroleum is falling now, we’re seeing natural gas now pushing higher. That was the inverse of what we saw a few months ago. Production restraint, increased demand for LNG exports as well as hot temperatures is giving the market a bit of a bounce. As we look out here for the next few weeks it seems like the demand for air conditioning will be humming. Hopefully you put on some of those long-term options that we recommended a few months ago.

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Thanks,

 

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