Global oil markets rebounded as global central banks, led by the Bank of Japan and Europe, basically said to the Fed that they weren’t going to take it anymore. The oil markets, along with currency markets around the globe, have had enough. They have been getting crushed by the Fed’s obsession with correcting their policy mistakes and have done so with little regard to the impact that a surging dollar might have on our trading partners as well as emerging markets. Yet foreign central banks are fighting back as they start to intervene in their currencies around the globe. It is the U.K. that is acting boldly with the creation of economic policies that will serve them well for many years to come.
Reuters reports that the Bank of England stepped into Britain’s bond market to stem a market rout, pledging to buy around 65 billion pounds ($69 billion) of long-dated gilts after the new government’s tax cut plans triggered the biggest sell-off in decades.
The pound has been getting crushed because of the actions by the Fed and the fact that the market, at least in the short term, doesn’t like the fact that they’re taking a page out of Ronald Reagan’s playbook by cutting taxes, reducing regulations, and encouraging growth. The supply side economics for the U.K. will serve them well despite the recent turmoil, but they’re not scared, and they’re not going to let the U.S. Federal Reserve dictate the future of their economy.
The U.S. dollar finally pulled back, and oil started to finally decouple from the dollar after the U.K. announced it would start making treasury purchases at the end of October and the fact the Energy Information Administration (EIA) reported an extremely bullish petroleum status report that suggested that the talk of demand destruction in recent reports was probably exaggerated.
Then, if it wasn’t exaggerated, it appears that the break that we’ve seen at the gas pumps in recent weeks has inspired Americans to get back into their cars. Regardless of whether it is underreporting the demand in the weekly numbers, or the fact that we’re seeing a demand response to lower prices, we will get a better outlook on demand from the EIA on Friday with their monthly report.
Yet yesterday’s report was bullish in every category. Not only did we see supply drawdowns in every major category, we saw total product demand exceed where we were a year ago. We also saw a big surge in demand for gasoline and diesel week over week.
The EIA reported that crude supplies fell by 4.8 million barrels last week. That increase in supply came as the Strategic Petroleum Reserve released 4.6 million barrels into commercial inventories. The Biden administration is probably thanking their lucky stars that hurricane Ian did not force them to release more oil from the reserve to refineries because, let’s face it, they’re already doing that. The Biden administration has gambled with our strategic reserves by sending them to Europe. They are gambling that they would not have to use them here and came very close to losing that bet!
Of course, they don’t really care because the U.S. taxpayers would be the ones footing the bill anyway.
Petro demand surged last week as total product supply demand hit 20.770 million barrels a day. That increase was higher than a year ago. It was led by a big surge in demand for distillate fuels as well as a huge leap in gasoline demand. Gasoline demand rose by 504,000 barrels a day distillate demand surged by a whopping 768,000 barrels a day last week.
The EIA says that U.S. crude oil inventories are about 2% below the five-year average for this time of year. Total motor gasoline inventories decreased by 2.4 million barrels from last week and are about 6% below the five-year average for this time of year. Finished gasoline inventories increased, but blending components inventories decreased last week. Distillate fuel inventories decreased by 2.9 million barrels last week and are about 20% below the five-year average for this time of year. Propane/propylene inventories increased by 1.6 million barrels from last week and are about 2% below the five-year average for this time of year. Total commercial petroleum inventories decreased by 8.9 million barrels last week.
What this report suggests is that if the petroleum market starts to focus just on supply and demand, then prices should be substantially higher than they are. At some point, if oil prices decouple from the Fed and the dollar, a significant upside price risk exists. Now add to that the geopolitical risk from Europe to the supply side, and the market should be very bullish, so be careful.
Most people now acknowledge that the attacks on the Nord Stream one and Nord Stream two pipelines were acts of sabotage, yet at this point, no one knows who’s really responsible. While many pointed fingers at the Kremlin, Russia is pointing fingers at NATO. The Kremlin said that Nord Stream damage might be state terrorism. The Kremlin said that incidents on the Nord Stream pipelines are a very dangerous situation, and it needs investigation. They responded to reports that Russian ships were seen near the leaks by saying that there were many more NATO ships in the area than Russian ships.
The other very bullish factor is the growing sense that OPEC is not going to take it anymore. OPEC has sensed its frustration with the Biden administration and these global releases from strategic reserves. Russia last week said that they were going to bring a million barrel a day production cut to the table at the October 5th meeting. Reports this morning suggest that OPEC plus Russia are beginning discussions around a production cut, and it looks very likely that a cut is coming. The question is how big it will be. OPEC and Russia may want to shock the market in awe as they successfully gain control of the global price. Strategic Petroleum Reserve releases are coming to an end, and they realize that they will have more sway over the global marketplace.
As we have said before, despite the recent weakness in price, there is significant upside risk in the oil and gas markets. Many people have been loaded into a false sense of security with the recent price break, but you just have to go to the gas pump to see the prices rising again. You have to look at the fact that we’ve had a slew of refining issues around the world that are going to keep supply tight as we head into winter. Not only is the BP (NYSE:BP) Husky refinery in Toledo going to be out until next year, but LyondellBasell Industries (NYSE:LYB) also said it was delaying the restart of its ethylene cracker refinery in France.
Biden once again is inferring that U.S. oil and gas industry is trying to gouge the public making warnings that he will act if he sees any sign of gouging. But one must wonder if the U.S. swollen gas industry is trying to increase prices, then why are they running their refineries so hard? Reuters reports that U.S. oil refinery utilization rates, a measure of how operators view future fuel demand, could top 90% next quarter for the third consecutive period, industry analysts projected, reflecting scant stocks and strong demand for diesel. Historically, utilization rates fall in the fourth quarter as refiners begin winter maintenance and motor fuel consumption slips after the U.S. summer driving season ends. This year’s final quarter, however, could see operators hold production rates high to grab strong diesel margins, they said.
As far as naturas gas prices go, they seem to have bottomed. The market seems to have priced in the demand destruction that is going to come from the power outages created by Hurricane Ian. With signs of frost or winter coming into parts of the country, the market’s going to have to focus on the fact that supplies in the United States are below average. We’ll get The Energy Information Administration's natural gas report today, and if it’s bullish, then natural gas may have hit bottom. Internationally the International Energy Agency and its director is warning that global LNG markets may be tighter in 2023 than they were in 2022. That fact should provide underlying support for the U.S. natural gas market as well.