The Energy Report: Fed Anxiety

Forget rising gasoline prices or the fact that there was no more oil released from the Strategic Petroleum Reserve (SPR). The oil and product markets are infected with Fed anxiety. Oh sure, they might be worried about OPEC and the upcoming Russian sanctions and stupid price cap, but Fed anxiety shook the oil trade. To be fair, it was not just oil that was infected with fear. The rally in the US dollar led to risk-off selling for many high-flying commodities yesterday and today, except for a lot of the grain complex that is getting more concerned about the size of the South American crop against a backdrop of global carryover stocks that are hovering very close to all-time lows.

Yet perhaps the market should be more upbeat about the prospects for the global economy as the International Monetary Fund is raising their forecast for growth and lowering the outlook for inflation. The IMF says that gobal growth is projected to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023, then rise to 3.1 percent in 2024. The forecast for 2023 is 0.2 percentage points higher than predicted in the October 2022 World Economic Outlook (WEO) but below the historical (2000–19) average of 3.8 percent. The rise in central bank rates to fight inflation and Russia’s war in Ukraine continue to weigh on economic activity. The rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery. Global inflation is expected to fall from 8.8 percent in 2022 to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic (2017–19) levels of about 3.5 percent.

Yet, if we see an uptick in growth, where are we going to get the extra oil to meet a surge in Chinese oil demand? The Biden administration says it wants to crack down on Iran, which is skirting oil sanctions but lacks the willpower because they fear an oil price spike. Iran has been laughing at US oil sanctions as they have no respect or fear of the Biden administration.

The Biden administration’s SPR game has come to an end, as there was no oil released from the SPR for the third straight week. That should lead to some major US crude oil draws in the coming weeks after US refiners start to come out of maintenance, both planned and unplanned. This week, we should see another increase in Cushing, OK supply, as refiners are still shut down but with an uptick in exports. Crude supply should see a drawdown in tonight’s American Petroleum Institute report. We should also see a draw in gasoline and distillate, and the tightness of product supply has been showing up at your local gas station. While the futures indicate that we will see some relief, the truth is that the oil product market is on a tinder keg. This is key after it was reported that EU imports of non-Russian gasoil and diesel rose sharply last week, helping to build up inventories ahead of the bloc’s impending embargo on Russian oil products.

Oil traders should not be expecting too much news out of the OPEC meeting. Right now, they are continuing to stay the course even as the OPEC cartel is warning about historically low spare oil production capacity. OPEC is right; there’s no room for error in the system. It was reported that Russia’s President Vladimir Putin and Saudi Arabia’s Crown Prince Mohamed bin Salman discussed cooperation within OPEC+ to provide stability to the global oil market. That should make the anti-US oil crowd happy as they continue to strengthen Putin and Bin Salman with every barrel of oil and every BCF of gas they do not let us produce.

Venezuela, the Biden administration’s great hope to replace SPR oil, now wants to get paid. I know! That messes things up. It seems that even as they are starting to sell oil after Biden lifted some sanctions because they owe everybody money, they do not see the cash. Now their state oil firm PDVSA is toughening terms for buyers after a month-long halt to most exports of crude and fuel, demanding prepayment ahead of loadings in either cash, goods, or services, company documents showed according to Reuters. PDVSA’s new Chief Executive, Pedro Tellechea, put the move in place this month. It reinforces measures implemented last year after several buyers skipped out on payments for oil, which provides most of the South American country’s income.

While green energy madness drives up costs for everyday people and reduces global security, the question should be why the country is against natural gas. Talking about banning gas stoves and not allowing natural gas buildings even though natural gas is the cleanest burning fossil fuel. Yet the US is awash in natural gas, and that could help lower the cost of heating and electricity if the government would embrace this fuel. Many forget that Alan Greenspan once warned that the greatest threat to the US economy was our inability to produce natural gas. The US oil and gas industry solved the issue and helped avert a major economic crisis.

Now the Energy Information Administration reports that the proven reserves of natural gas increased by 32% in the United States during 2021, according to EIA, thanks to US oil and gas producers. Proved reserves of natural gas in the United States grew to a new record of 625.4 trillion cubic feet (Tcf) in 2021, a 32% increase from 2020, according to our recently released Proved Reserves of Crude Oil and Natural Gas in the United States, Year-End 2021 report. US proved reserves had previously decreased by 4% in 2020 as a response to prices that fell with decreased consumption during the first year of the COVID-19 pandemic. At year-end 2021, however, five of the eight states with the most proved reserves of natural gas each reported new record volumes, driving the growth nationally. Proved reserves are operator estimates of the volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Prices heavily affect estimates of proved reserves. The wholesale spot price for natural gas at the US benchmark Henry Hub in Louisiana averaged $3.89 per million British thermal units in 2021, almost doubling from 2020, according to data from Refinitiv.

The EU continued importing from Russia as well, taking 88,000 t/d last week, compared with 80,000 t/d across the whole of last year. The unusually large volumes of non-Russian imports may be difficult to sustain over a prolonged period. But European traders say their storage tanks are relatively full, and demand from buyers has been depressed since November, so they are not worried about securing replacements for Russian diesel next month when the EU ban comes into effect. Most see a structural shortfall in Europe once diesel stocks are run down, and demand picks up.

India is the only major non-Russian supplier that has not increased shipments to Europe this month. The EU’s daily intake of Indian diesel and gasoil was lower in January than the 2022 average. Supply from non-Russian sources has been back-loaded in January, with last week’s flurry