Mama said there’d be days like this, and we did too as the oil market is pulling back from a case of too much bullishness. Oil was up above the Bollinger band and, being very overbought, could not stand alone against a backdrop of a plunging stock market and a mixed Energy Information Administration (EIA) supply report that was weighed down by a bearish gasoline supply reading.
Even fears that Russia might accept Biden’s invitation to make a “small incursion” into Ukraine were put on the back burner as crude oil started a sell-off that brought down products that held up pretty well for the bulk of the official trading session. With earnings and Fed fear about increasing interest rates, the key for oil is whether it can ignore the headwinds of a potentially slowing economy while the global supply available to meet demand numbers looks bleak.
Bloomberg News reported that the IEA is trying to figure out where 200 million barrels of oil went. On Wednesday, the adviser to energy-consuming nations said that observable global oil inventories plunged by more than 600 million barrels last year. That would be fine were it not for the fact-based on its estimates of supply and demand — that the decrease should only have been 400 million. There is always a gap between the two, but the 200-million-barrel discrepancy means the oil market could be tighter than previously thought.
The IEA said the gap could result from underreporting of demand or over-reporting production. Its monthly report is a benchmark for traders trying to evaluate the balance between supply and demand the world over. the agency said on Wednesday:
“A retrospective view shows the difficulty over the past two years of reliably analyzing and forecasting supply and demand. Lessons learned will improve the work in 2022 and allow us to better understand our market.”
Well, I have contended for some time that based on what I see, the IEA has underestimated oil demand on a consistent basis. I assumed it was because the agency represents oil-consuming nations and that underestimation usually caused oil prices to dip, allowing those countries to buy oil cheaper. I also believe that the IEA has drifted away from its original mission and has become more of a quasi-political organization than an oil reporting agency. I also have questioned why the market reacts to their long-term reports because they have been wrong and consistently wrong when it’s come to predicting future oil demand trends.
The IEA also has been complicit in creating an environment that restricts the flow of money into new oil and gas projects.
Of course, we are seeing the fallout from the lack of investment in fossil fuels and fossil fuel projects, and it’s creating many problems throughout the globe. One of the main problems is that the International Energy Agency and the countries and the Paris climate accord and the Biden administration are betting our energy future on technologies that don’t exist. They have given the impression that the world can become carbon neutral by 2050, but only if we stop all investments in fossil fuels.
Well, traders are going to keep an eye on what the Fed talks about next week. The IMF managing director Georgieva said the Fed rate hikes could put a damper on what already is a sluggish recovery in some areas.
Some people are worried that the Fed may overreact to a sharp rise in inflation, but others think that the Fed has created this inflation with too much easy money. Whatever side of the debate you fall on, the bottom line is that if the Fed becomes more aggressive in raising rates, it could slow the economy and slow oil demand. That will take some time to happen. On the other hand, Christine Lagarde says that the recovery has been much stronger than anyone had expected, so that in turn may increase the odds that she is ok with a Fed interest rate increase.
The EIA did not give us a clear direction. Crude stocks fell by 1.3 million barrels. The SPR released 1.3MB. Crude demand increased 535k bpd. Ready to use gasoline stocks increased by 4.9MB.
Total gasoline stocks increased 5.9MB. This has been the biggest 3 weeks build in gasoline history. ULSD stocks fell 1.7MB.
This is a key day. A close below $82.00 today would look a little toppy, and that would put us on guard for a larger correction. On the other hand, if we do see some type of action over the weekend in Ukraine, that could give the oil a big boost. When in doubt, pair back positions to see if the correction in oil is going to be modest or a more sizable sell-off.