Gains Wipeout. The Energy Report 09/10/2024

Oil price have not only wiped out their gains in one of the worst September performances in stocks since the 1950’s but we are also seeing the price movement suggest a collapsing Chinese and US economy causing a run on the oil bank. In today’s American Petroleum Institute (API) report we may see oil inventories rise slightly. The global supplies for oil and products in storage are near record seasonal lows while demand is near record seasonal highs and all inventories will still be below average for this time of year.

Yet with demand destruction fears overtaking reality it may not matter. Implied volatility for the dollar according to Bloomberg is at the highest level since the 2023 banking crisis. and the VIX fear index is up, while down hard today, is up 6.11 percent on the month and 44.54% over the past five years. In the past during the 2023 banking crisis, when things seemed to stabilize on the banking front, the focus returned to supply and demand data and not so much based on fear. And during this selloff fear has driven the mood along with record hedge fund selling. It is possible these fears are justified after the horrible monthly jobs report and more concerns about the Chinese economy. Yet many times when we see the fear spike and the corresponding oil price drop, it has been overdone.

China oil demand also is not quite fitting the collapsing oil demand narrative. China custom data showed that Chinese crude imports were at 11.61 million barrels per day (mbpd) in August vs 10.01mbpd in July. Last year in August they imported 12.48 mbpd but that was up from August 2023. Now reports that China will up their crude imports to fill their SPR is also another factor that should keep Chinese imports high.

Yet Reuters still warns that, “Oil products demand in China, long the driver of global crude consumption, peaked in 2023 and is forecast to decrease by 1.1% annually between 2023 and 2025, with the drop accelerating in subsequent years, a China oil researcher said on Tuesday. Declining Chinese oil demand from the growing adoption of liquefied natural gas (LNG) trucks and electric vehicles (EV), as well as China’s slowing economic growth following the COVID-19 pandemic, has been a drag on global oil consumption and prices.” Of course you always have to worry about peak demand or peak production as the market almost always process those assumptions to be incorrect.

Fox Weather is warning that Tropical Storm Francine might be bigger storm that we bargained for. Tropical Storm Francine developed yesterday and is causing action by US oil and gas producers as they prepare for the storm. Fox Weather is reporting that, “Francine is likely to become a hurricane on Tuesday as final preps underway in Texas, Louisiana ahead of landfall. Fox Weather says that the current National Hurricane Center forecast calls for a dangerous Category 2 hurricane landfall in Louisiana on Wednesday evening. A Hurricane Warning has been issued for parts of the Louisiana coast. The storm is a concern as it heads over major oil producing areas and cutting right into the heart of the US refining sector while most refineries can handle a Category 2 storm the concerns about flooding and power outages could cause some concern.

Already we have seen offshore oil and gas producers in the US Gulf of Mexico started evacuating staff and reducing drilling activities. Chevron announced that non-essential employees and contractors have been pulled from four platforms in the US Gulf of Mexico ahead of a tropical storm. Reuters reported that, “Energy companies began evacuating offshore workers and shut-in output at several production platforms ahead of the storm. The port of Brownsville, Texas, was closed and others from Corpus Christi north to Galveston had imposed restrictions.”

Petroleum supplies should see a slight increase this week. We’re looking for basically slight builds across the board. That goes for crude oil, distilled inventories and gasoline. Refinery runs should also pick up by 1.0%.

Natural gas is the only major energy future that is showing a little green this morning. Reuters reports that, “The northern hemisphere summer has not yet officially finished, but United States natural gas markets are already sizing up supply and demand balances for this winter and the next year, and indicate that sharply higher prices may emerge. Forward markets for Henry Hub futures, the benchmark U.S. natural gas price, indicate that prices will average $3.20 per million British thermal units (mmBtu) in 2025, compared to an average of $2.22 so far this year, data from LSEG shows. If realized, that roughly 44% year-on-year price increase would be the steepest annual climb since 2022, and could worsen energy product inflation trends despite a slowdown in broader price gains in the United States.

The bullish outlook in forward markets contrasts with a fairly downbeat mood in U.S. gas markets so far in 2024. U.S. futures plumbed 4-year lows in the spring as major storage hubs emerged from last winter with bloated stockpiles after mild temperatures during the traditionally coldest months of the year cut gas use for heating.

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