Is there a better way to celebrate the Thanksgiving holiday than a selloff in oil? Selling oil around Thanksgiving is becoming an ingrained tradition almost as sacred as football and Turkey.
Despite yesterday's impressive comeback, the failure to breakout, along with light holiday volume, allowed the market to sell off despite bullish data from the American Petroleum Institute (API). The API showed another big 4.2 million barrels drop in crude oil supply as well as a 400,000-barrel drop in gasoline supply and a 1.1 increase in distillate supply.
It is not helping that there are concerns about Chinese demand as covid cases increase and workers are protesting conditions at an Apple (NASDAQ:AAPL) production factory. Now you might think that this selloff is stupid, especially when you consider that even with Chinese lockdowns, supplies are still near historic lows, but that is not nearly as stupid as the E.U. and US Russian oil price cap.
The Wall Street Journal reports:
"The U.S. and its allies are seeking to agree as soon as Wednesday on a level for a price cap on Russian oil, with officials discussing setting it at around $60 a barrel as the group rushes to complete the plan, according to people familiar with the talks.
The price cap, which the people said could still be set as high as $70, is at the center of the West's efforts to sanction Russia for its invasion of Ukraine. The Group of Seven advanced democracies and Australia plan to begin enforcing the price cap on Dec. 5 after struggling to craft its details this fall.
Ambassadors from the 27 European Union member states are scheduled to meet Wednesday when they will try to agree on a price. The bloc needs a unanimous agreement on the price for it to take effect, and diplomats warned that it may prove difficult to achieve quickly. The G-7 is aiming to approve the cap soon after the E.U."
Similarly, Bloomberg reported that:
"The European Union watered down its latest sanctions proposal for a price cap on Russia's oil exports by delaying its full implementation and softening key shipping provisions. The bloc proposed adding a 45-day transition to the introduction of the cap, according to a document seen by Bloomberg. The proposed grace period would apply to oil loaded before Dec. 5 — the date oil sanctions are due to kick in — and unloaded by Jan. 19, aligning the E.U. to a clause previously announced by the U.S. and the U.K."
The problem with price caps is they never work. The other issue is that the price that they are setting is already higher than where Russian crude oil normally trades. This price cap is coming at a time when global supplies are below average and is a perfect example of why this will not work. Let's assume we get a very cold winter, prices spike, and the price caps go into effect. What if Russia should decide to stop selling oil?
In such a case, global inventories will draw down dramatically and will cause a shortage of diesel. Factories will have to shut down, people won't be able to afford to heat their homes… and the list goes on.
Even the debate in the European Union as to what would be a fair price to cap Russian oil shows the futility of what they're trying to achieve. Market forces have always proven to be the best way to set prices. The Russian price cap is set at a fairly high level; it may still prove to be too low if it is a cold winter. Then what if Russia decides to cut off supply?
I've said it before, and I'll say it again, show me a price cap, and eventually, I'll show you a shortage.
One group that has been rooting for lower oil prices has been the Biden administration. They have to buy back the oil that they sold from the U.S. Strategic Petroleum Reserve. White House energy advisor Amos Hochstein said that the Biden administration would be opportunistic when it comes to repurchasing oil for the strategic petroleum reserve and start the buyback in the $70 a barrel range. They better hurry because I don't think it's going to be there too much longer.
Oil prices also dipped a little bit on reports that Saudi crude exports increased by 120,000 per day in September to 7.72 million barrels a day which is about a 29-month high, according to JODI.
The U.S. has pushed its allies in Europe to tweak a package of oil sanctions, which included an outright ban on services, that the bloc originally adopted in June by adding the price cap with two aims: to keep Russian oil on the market to avoid price spikes, while at the same time limiting Moscow's revenues.
The Wall Street Journal is reporting that a surge in the cost of shipping oil between the world's ports is buoying energy prices, even as a gloomy economic outlook has dragged down crude near its lowest levels of the year. Many shipments now spend five times longer in transit to refineries or wholesalers than they would have before the conflict, tanker operators and analysts say. The upshot is that fewer vessels are available in a global fleet that has little prospect of quickly expanding in size, a boon for shipping companies.
This selloff should be the time to put on long-term bullish positions in oil and heating oil. Many times near Thanksgiving, we put in the low for the year, and we think that's going to happen if it hasn't already happened.
Natural gas is back on an upward track. The possibility of a real cold front coming in December is inspiring buying. The markets also expect in today's report that's going to come out at 11 am that we will see a withdrawal somewhere in the area of 86 BCF.