Completed Preparations. The Energy Report 10/23/2024

Oil prices continued to swing in waves of uncertainty as reports that the Israeli army has completed its preparation to attack Iran and should take place in days. This nervousness comes as we get a report from the American Petroleum Institute that showed yet another drop in the US gasoline inventories of 2.09 million barrels and a drop of 1.478 million barrels in distillate. These are counter-season draws and signals that the market is very tight though the market did see a increase of 1.643 million barrels in crude oil and that seemed to alleviate concerns of a tight market even as supplies in Cushing, Oklahoma fell by 260,000 barrels.

Yet we continue to get mixed message surrounding Chinese oil demand. Yesterday oil rallied after China upped it import quota for oil. Today a story about China’s refiners reducing runs on low margins seem to be putting a damper on prices. This comes on a day when planet earth is consuming more oil than it ever has before. World oil demand hit a record high for the third month in a row.

According to data from Standard Chartered, oil demand is at an all-time high of 103.79 million barrels per day (mb/d), an upwards surprise of about 450 thousand barrels per day, Those numbers should be conformed shortly by JODI and the rest of the world’s reporting agencies. This continued increase in oil demand should raise question about the predictions of peak fossil fuel demand and should have every country on the planet change their energy policy to face fossil fuel reality. That is even as China demand is raising questions.

It is not just oil. It is going to be natural gas as well. In fact instead of peak demand, Cheniere Energy is predicting that Chinese demand for natural gas is set to jump by more than 50% by 2040. That is in stark contrast to what the International Energy Agency is trying to feed us. Yet as supplies tighten and risks rise, traders seem to be staying away from direct participation in the futures and instead fawning for options.

Bloomberg reported that, “Oil traders are holding a record number of options contracts as they seek to protect against the risk of a price spike driven by potential supply disruptions in the Middle East. Brent options open interest this week topped 4 million contracts for the first time — the equivalent of four billion barrels. The total number of positions held by traders has jumped by more than 25% so far this month.

Bloomberg says that, “The surge in activity reflects the way traders are hedging against heightened risk of disruption in a region that accounts for about a third of the world’s oil supply, while views on the outlook for the market into 2025 are bearish.” We will see.

The oil market is in holding out a lot of hope that the visit by Secretary of State Anthony Blinken to the Middle East is going to avoid an attack on U.S. oil and gas infrastructure. A report that the Biden administration was offering Israel a lot of goodies to not attack their oil infrastructure may have reduced that risk. Anthony Blinken has moved on to Saudi Arabia, a country that the Biden administration came into office vowing to make a pariah state, to try to intervene in the current geopolitical situation that has become decidedly worse since Biden and his Vice President Harris has been in office.

Once we get through this mess, supply and demand is going to matter. We continue to believe the talk about weak Chinese demand will be offset with future Chinese stimulus. We think the report that OPEC is going to raise production dramatically this year is wrongheaded.

We are looking for a very tight market and continue to see demand for oil break records for the next few months. I really believe that if we get a real winter, we could see prices go up dramatically from these price levels.

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