Cold Days. Good times I remember. Oil prices are focusing on winter against a backdrop of the Keystone pipeline outage worries and threats by Russia to ban the sale of Russian oil to members of the “Price Cap Coalition.” The market is shaking off a bearish American Petroleum Institute report where it was reported that crude inventory increased by 7.819 million barrels with the help of a 4.7-million-barrel release from the Strategic Petroleum Reserve (SPR). Perhaps the market is shaking it off because of the cold weather, or maybe it’s because of reports that Saudi Arabia reduced their crude oil production by 489,000 barrels a day last month to 10.48 million barrels. And reports that the Keystone Pipeline continues to be at least partially offline until December 20, which is raising real concerns about the ability of refiners to continue on their stretch of impressive product production.
Now, reports that the International Energy Agency underestimated global oil demand… again. They are warning that oil prices could spike again. Argus Media reported that the IEA said it had been surprised by recent resilient oil consumption data, revising higher its forecasts for demand growth this and next year. But it said the oil market is heading into a period of significant uncertainty at a time of low global stocks, raising the possibility of a price rally. Its latest monthly Oil Market Report (OMR) released on December 14 said demand has been particularly buoyant in non-OECD regions, where gasoil use was substantially higher than a year earlier. But falling consumption in developed economies would have depressed its fourth-quarter forecast if not for some notable gas-to-oil switching.
Although the IEA still sees demand contracting in the current quarter, it now puts this fall at 110,000 b/d compared with the 240,000 b/d forecasts it made in its November OMR. Coupled with an upwards revision to its third-quarter consumption assumption, the IEA raised its forecast for demand growth this year by 140,000 b/d, giving a year-on-year increase of 2.3mn b/d to 99.9mn b/d.
The API showed the fruits of the refiners yet again by reporting an 877,000-barrel increase in gasoline supply as well as a much-needed 3.9-million-barrel increase in distillate supply. I say much needed because supplies are still below average, and the potential for temperatures that could be 15 to 25 degrees below normal for most of the United States should suck down a lot of inventory.
Transport Topics reported that TC Energy’s efforts to restart a segment of its Keystone oil pipeline after a 14,000-barrel spill had been delayed by bad weather, according to people familiar with the matter.
The company’s latest estimate for resuming service on a leg of the pipeline extending to Patoka, Ill., is December 14, said the people, who asked not to be identified, discussing confidential matters. TC Energy (NYSE:TRP) initially planned a partial restart on December 10, but rain and the rupture’s proximity to a waterway made excavation of the pipeline more difficult. The timeline is subject to change, but the company is still aiming for a full restart on December 20.
Now add to that the signs that China is going to reopen its economy, and suddenly you have one of the tightest oil markets we’ve had in years. Despite recent signs of so-called demand destruction, the market suggests that maybe demand is picking up again, or at least supplies are falling. We’ve seen Brent crude oil going back into backwardation.
One of the things that could slow the market’s momentum today is the Federal Reserve. A 50 basis point increase is a given, but after yesterday’s better-than-expected Consumer Price Index (CPI), the index showed a 7.1% increase in prices over last year and a 0.1% increase over the prior month, less than the 7.3% increase expected. Because of that, the market is pricing in the possibility that after this rate increase, the next one might not be as large. The market is pricing in a 25-basis point increase. If that is indeed the case, that should be very supportive of oil.
Of course, that’s what Fed Chairman Jerome Powell was trying to say before the Fed went into its quiet period. The stock market soared on those comments, and oil prices soared on those comments. Then the Federal Reserve leaked a story to the Wall Street Journal saying that the market had it wrong and that the Fed was going to raise rates higher than the market had anticipated, and everything fell apart. That is why the Fed statement today and Jerome Powell’s press conference are going to be very important.
Natural gas is rocking on the weather but retracing as they want to see how cold it might actually get! S&P Global Platts is reporting the EIA will likely report a 53 Bcf drawdown from inventory during the week, according to S&P Global (NYSE:SPGI) Commodity Insights’ latest storage survey. The consensus estimate from analysts reflected a wide range of storage-withdrawal predictions for the week, which ran the gamut from 31 Bcf to as much as 75 Bcf.
If accurate, the expected storage pull of 53 Bcf in the week ended December 9 would pale in comparison with the five-year average drawdown of 93 Bcf and fall far short of the year-ago withdrawal of 83 Bcf; both recorded during the corresponding week, EIA data showed. As a result, the US inventory level would fall to 3.409 Tcf, narrowing this season’s storage deficit to the five-year average of just 18 Bcf, or less than 1%. The shortfall to 2021 would simultaneously narrow to 21 Bcf. Also just a fraction of a percent below the year-ago storage level.
EBW Analytics reported that natural gas futures were revived by reversing weather models pointing to extreme cold to close out December. The market has appeared reticent following recent high-profile forecast busts; if the cold blast delivers, however, 225+ Bcf weekly storage draws could send January shooting higher.
Still, on a seasonal basis, the winter storage trajectory appears sufficient and downward pressure on NYMEX futures could resume as soon as the market can see through the upcoming cold blast to warmer temperatures ahead. In this context, last week’s precipitous declines may be a harbinger of likely downside ahead for mid-to-late winter. While the NYMEX future is likely to trend higher near term, natural gas could turn 20-30% lower over the next 90 days.