Commodity volatility went crazy as the Federal Reserve signaled, “the lack of further progress on there are inflation target in recent months” shook up a whole host of commodities. We started with dramatic moves in grains, meats, industrial metals, and precious metals and of course in oil that not only had to deal with the Federal Reserve seemingly putting off interest rate cuts, but also a very disappointing weekly inventory report that suggests that US oil demand is sputtering. Yet the further lack of interest rate cuts and the drop in oil prices means that OPEC plus could extend its voluntary production cuts beyond the second quarter and into the New Year. The plunge in oil might reverse if OPEC sources are correct and OPEC signals an extension of the cuts then more than likely this is going to be a trial balloon, but our expectations are very clear. If prices don’t hold this area, then OPEC will extend cuts and possibly even work towards a larger cut in production.
While the weekly demand numbers for total petroleum products came in at an impressive 20.417 million barrels of oil a day, we saw an uptick in gasoline demand which was up 195,000 barrels a day from the week before and is still coming in at a weak 8.618 million barrels a day. Distillate demand was also up week over week, coming in at 3.678 million barrels a day. But where you see the demand discrepancy is when you look at the four-week moving average, for example, gasoline averaged 8.6 million barrels a day which is down by 3.6% from the same period last year. The weakness in gasoline demand probably reflects the big drop that we saw in consumer confidence last week.
This is a warning sign that high inflation is really starting to cut into the consumer’s ability to spend money. Now if you put this in the context of the Federal Reserve coming out saying that they are going to have to potentially pause an interest rate cut, it means that there’s going to be more pain for consumers because the only way you’re going to bring down gasoline demand is to make the economy tougher for most people.
We were expecting a bigger uptick in gasoline demand this week and while the weekly numbers have not been so accurate, the trend is not encouraging. The data shows a drop in distillate inventory that if you look at the four-week moving average, is down 8.2% from the same period a year ago. The other main reason why the report came out as bearish as it did was the fact that we saw commercial crude inventories surge by 7.3 million barrels from the previous week. Not all of that was demand related but due to a surprising increase in U.S. oil imports and a big decrease in U.S. oil exports from the record-breaking numbers that we’ve been seeing. US crude exports fell from 5.179 million barrels a day to 3.918 million barrels a day, down 1.261 million barrels a day. US crude oil imports on the other hand rose to 2.854 million barrels a day and that was up from 1.318 million barrels a day the week before.
The market also seemed to be removing some of the geopolitical risk and worst-case scenarios. Even with the hopes of a ceasefire deal between Hamas and Israel falling apart, the market seems unfazed that it’s going to have any negative consequences for the flow of oil.
Get geopolitical risks remain. Overnight it was reported that Ukraine drones hit a Rosneft refinery. Bloomberg reported that Ukrainian drones hit a major oil refinery owned by state-controlled Rosneft PJSC in Ryazan, southeast of Moscow, just as the facility’s crude processing had recovered from a previous strike. The overnight attack caused a fire at the plant, a person in the Ukraine military who is familiar with the matter told Bloomberg News.
Apparently, the Wall Street Journal reported that they found evidence of collusion! They reported that Ex-Pioneer CEO Scott Sheffield was barred from the Exxon (NYSE:XOM) Board in the merger between the two companies. The Journal says that antitrust enforcers are set to allege Scott Sheffield discussed coordinating oil production levels with other producers and OPEC. Exxon agreed in October to buy Pioneer for $60 billion in stock, marking its biggest deal since it merged with Mobil in the late 1990s and the largest oil-and-gas deal in two decades. The WSJ says that they will all edge that Sheffield engaged in collusive activity that could have raised the price of oil, these people said. The allegations will include that Sheffield sent hundreds of messages to representatives of the Organization of the Petroleum Exporting Countries about market dynamics, including pricing and production levels.
The Journal, in a must-read, said that,
“For years, investors urged frackers to stop overspending on drilling new wells and pumping ever-increasing amounts of crude, and instead to keep production largely flat, which would increase cash flows and enable higher returns to shareholders. It took years—and a crippling pandemic—for shale producers to agree.”
U.S. frackers fiercely competed for years with OPEC for market share. At a 2017 dinner in Houston, shale executives sat down for a first-of-its-kind dinner with Mohammad Barkindo, then the secretary-general of OPEC. Sheffield attended the dinner, during which Barkindo discussed OPEC negotiations on cutting oil output, among other topics.
This is going to be interesting. Many investors and people in the oil industry believe that when the US frackers started to overproduce and flood the market with oil that it was not a good business decision.
The column of oil depressed prices and many of the producers racked up huge debt. OPEC on the other hand is a well-oiled machine these days and they can really have an impact on global inventories. The question becomes at what point does collusion crossover with common sense?
Many people in the industry think that shell producers were derelict in their duty by not cutting back production earlier. One of the things I used to write during those days is that the frackers used to try to lose money on every barrel then try to make up for that in volume. Of course, the commodity markets are probably the best way to hedge the risk of the boom and bust industry. But perhaps there has to be a better way for the US oil and gas industry to judge the market so that they can stay competitive with the likes of OPEC and Russia.
After the huge sell-off the last couple of days as we ended the big plunge on the last trading day of April and we continued to sell off on the first day of May, we do believe that we’re getting pretty close to a value range for oil. While there still could be some downside today this will probably be a good opportunity to put on your spring hedges.
Natural gas is attempting to bottom but failed when the rest of the global markets seemed to fall apart. Today is going to be a big day as far as the natural gas injection number. We’re looking for an increase of 54 BCF.
The Biden administration’s attitude towards the energy policy is to throw as much of it on the wall and see what will stick. New rules by Biden's Environmental Protection Agency is going to compel coal and natural gas power plants to cut or capture 90% of their carbon pollution by 2032 according to the very optimistic but not very scientific EPA. They say this is going to reduce carbon dioxide emissions by 75% compared to its peak in 2005. The EPA wants to use 2005 as a benchmark because it makes them look good. The Biden administration wants to push through as many environmental rules as they can regardless of the economic fallout because they need to start pleasing their environmental base that is turning against them. Biden’s approval ratings are in the sewer and in desperation they’re going to throw out as much as they can in the next few months.
West Virginia Attorney General Patrick Morrisey said he’s going to challenge the new EP rules in court he said that the US Supreme Court has placed significant limits on what the Environmental Protection Agency can do and we plan on ensuring that those limits are repelled and we expect that once again we will prevail on this out of control EPA.