Petroleum traders must be wildly pessimistic about the state of the global economy because not even what you might call stunningly bullish supply-side data can muster an oil price rally.
As reported by the Financial Times, “U.S. stocks of diesel and heating oil have plunged to historic lows, driving up prices for fuels critical to industry, freight, farming and many households. Inventories of the fuel category that includes both products stood at 107.4 million barrels last week, according to government data released on Wednesday, up slightly from the week before, but the lowest level for this time of year since 1951.”
The Wall Street Journal reported, “While the price of gasoline is up about 14% this year, diesel has climbed about 50%, to $5.35 a gallon, according to AAA/Opis. The gains widened the gap between the two to an all-time high of $1.61. A year ago, it was 23 cents. Wholesale diesel, delivered into New York harbor, traded at a record premium to crude oil in October, according to the Energy Information Administration, which also reported the country had only 25 days of diesel in reserve, the lowest since 2008."
And it is just not products. Not only are global supplies at the lowest levels since 2004, but U.S. inventories are plunging, a fact that has been hidden somewhat because of Strategic Petroleum Reserve releases. Javier Blass at Bloomberg pointed out: “Over the last 12 months, U.S. commercial crude stocks have increased by 2.4 million barrels, while strategic stocks have declined by 214.0 million barrels."
The EIA yesterday reported that U.S. commercial crude oil inventories decreased by 5.4 million barrels from the previous week. At 435.4 million barrels, {{8849|U.S. crude oil inventories are about 4% below the five-year average for this time of year. Yet, Strategic Petroleum reserve supplies are at the lowest level in 38 years.
The only way that this market is not rallying from such bullish data is the expectation that we are headed into a deeper recession. There is some evidence that we are seeing a potential slowdown in the economy right now. The cost of container ships is going down. We are hearing from places like Target (NYSE:TGT) that sales are on their way down. Consumers are struggling.
At the same time, we have the Federal Reserve that is telling us right now that it still wants to be very aggressive in raising interest rates even though we’ve seen mixed signals from some Fed speakers. The hawkishness has given some support to the dollar, which had been selling off.
Reuters reported Fed Governor Christopher Waller, an early and outspoken “hawk,” said the Fed has a way to go on rates and will still need increases into next year, although he added that data made him “more comfortable” with the idea of slowing to a 50-basis-point hike in December. San Francisco Fed President Mary Daly told CNBC it’s reasonable for the Fed to raise its policy rate to a 4.75%-5.25% range by early next year, and that pausing rate hikes is not part of the discussion.
Yet, at the same time, Reuters is reporting: “Oil prices settled more than a dollar lower on Wednesday after Russian oil shipments via the Druzhba pipeline to Hungary restarted and as rising COVID-19 cases in China weighed on sentiment. The market later recovered some losses after U.S. crude stocks fell more than expected on the back of heavy refining activity. The Energy Information Administration said U.S. crude inventories fell by 5.4 million barrels last week, compared with expectations for a 440,000-barrel drop. In addition, tanker-tracker Petro-Logistics said in a report that exports from the Organization of Petroleum Exporting Countries (OPEC) have fallen significantly so far this month. Meanwhile, Iraq plans to raise its production capacity to around 7 million barrels a day in 2027, state-owned oil marketer SOMO told Reuters, although any increases will be in coordination with OPEC."
To cut through the noise, the reality is if supplies are dangerously tight, in the short term, the market can view the market negatively because the thinking that recessionary demand decreases will keep supplies ample. Yet, this is a dangerous game. That may be one reason why we’re seeing a lot of activity in out-of-the-money call buying and why the momentum right now seems to be very negative. We’re only a short trip to weigh from a massive oil and product price spike. Hedgers should take advantage of this market weakness and perhaps join the speculators in buying some calls. Maybe the economy will slow enough to where we stop seeing global inventories plummet, but then again maybe not.
Old man winter still has the final say in the natural gas market. Natural gas prices looked very weak, with a lot of speculation that the Freeport LNG terminal would not restart causing the market to plummet. Yet, forecasts shifted towards colder temperatures and that turned the market around. We think when Freeport LNG files its restart plan, we could see a mighty big pop if the weather forecast holds up.