Buckle Up America! It is the summer of the sequel blockbuster. The Biden Gasoline Price Hike 2 is coming soon to a gas station near you. Gas prices are going from expensive back to ridiculously expensive because as we warned, the price break that we got at the pump earlier this month around the Fourth of July was only going to be temporary. RBOB gasoline surged to the highest close since last October and that should send the retail price of gasoline to new highs for the year. The Biden administration has been distracted with trying to take away your stove or water heater, is running out of options to cool off the coming gasoline price hike, nor will it be able to cool down the anger of voters who associate his administration with higher gasoline prices.
Biden’s first response to high gasoline prices was to blame the oil companies and OPEC and so he decided to change the mandate of the Strategic Petroleum Reserve from and emergency stash of oil to a price control tool. He did this because Americans knew that gasoline prices started to rise as soon as Biden was elected. Joe Biden started a government-imposed price hike that was fed by his energy policy. He killed off the Keystone XL pipeline and put on drilling moratoriums on Federal land and other regulations that added uncertainty and discouraged US oil and gas investment.
That discouragement in investment is showing up in the Baker Hughes rig count that on Friday reported that active U.S. rigs drilling for oil fell by 7 to 530. According to MarketWatch, that followed five consecutive weeks of declines for U.S. oil rigs. The total active U.S. rig count, which includes those drilling for natural gas, fell 6 to stand at 669, according to Baker Hughes. The lack of investment has lowered the projections for US oil production. Now as prices rise, the Strategic Petroleum Reserve that has been emptied is no longer a viable option. The SPR acknowledged yesterday that there was no oil released from the reserve and held steady at 346.8 million barrels. And 133.4 million barrels below year ago levels.
This comes as last week the EIA reported that, “Total motor gasoline inventories are about 7% below the five-year average for this time of year. This week the expectations are that that deficit year-over-year will grow. Not only is gasoline demand stronger than the recession focused oil trade would have you believe, but the cost of oil is rising and refiners are being stretched trying to meet gasoline demand as well as a global diesel supply squeeze." Adding to those supply worries, Bloomberg reported that, “Exxon is expected to keep a Baton Rouge FCC down for several weeks, driving supply concerns just as demand is seen firming from West Africa to Europe. US implied demand is maintaining above year-ago levels after hitting a 19-month high in late June."
Adding to the cost of gasoline is the cost of biofuels with drought in the US and Africa and the war in Ukraine. Putin has taken the war to global food security by withdrawing from the Black Sea accord, attacking port infrastructure on the Danube River for the first time. Gerardo Moscatelli pointed out that the Chicago August soybean calculated board crush, thanks to biodiesel, the US has the most expensive soybean oil in the world and the best crushing margins. Ethanol prices are surging with the high cost of corn. Sugar hit a 1-month high as the world’s sugar mills have diverted more cane crushing toward ethanol production as opposed to food. “The food versus fuel debate has been raised in India. The Hindu Times reported that the Indian government has stopped releasing subsidized rice for the production of ethanol after it banned the export of non-basmati white rice. However, it will likely be resumed once several issues including allegations of profiteering by grain-based distilleries by diverting the grain to the open market are addressed.
Also driving the crude oil market is the breakdown of the Chinese weak demand argument even as it’s been reported the Chinese industrial sector is a far cry from what we thought it would be. The truth is their demand for diesel continues to be strong and the supplies of diesel remain tight around the globe. On top of that S&P Global reported that, “Chinese independent refineries are likely to keep importing large volumes of fuel oil as feedstock for the rest of the year to compensate for tight crude quota availability, refinery and trade sources told S&P Global Commodity Insights July 25." Three independent refineries, mostly based in Shandong, ramped up fuel oil imports in June to at least 1.32 million mt from 80,000 mt in the same month last year, only marginally retreating from the recent high of 1.59 million mt seen in April, data from S&P Global showed. The volume pushed up their imports to at least 6.96 million mt in the first half from a low base of 449,000 mt in January-June 2022, according to S&P Global data.
Crack spreads for both gasoline and diesel continue to be strong. The market expects demand to outstrip supply. We continue to recommend having upward price protection against a sharp rise in gas, diesel and crude oil. While the upward move has been delayed by concerns about the economy and what the Fed may or may not do, the supply and demand realities are getting much harder for the market to ignore.
Warren Buffet still loves the Energy Sector and loves fossil fuels. Bloomberg reports that, “Warren Buffett’s multibillion-dollar purchases of oil and gas investments early in the pandemic paid off when the sector cranked out record earnings in 2022. But instead of selling out for a huge profit this year, the Oracle of Omaha wants more. Berkshire Hathaway Inc. (NYSE:BRKa) is using this year’s dip in commodity prices to load up on some of Buffett’s favorite oil and gas investments, showing that history’s most famous investor sees opportunity in a sector long disfavored due to its volatility and effects on the climate. Earlier this month, Berkshire agreed to spend $3.3 billion to boost its stake in a liquefied natural gas export terminal in Maryland. This year it has also increased its holding in Occidental Petroleum Corp (NYSE:OXY) by 15% and bought more stock in five Japanese commodity traders. Meanwhile, Berkshire’s energy division is lobbying hard for a bill that would see Texas spend at least $10 billion on natural gas-fired power plants to back up its grid.” A must read.
Natural gas continues to be supported by the hot weather and it’s only going to get hotter. We are now seeing a substantial uptick in the market because there are expectations that we will see production stay strong. The EIA points out that, “Natural gas prices fall in first half of 2023 amid record production and mild temperatures. The average monthly spot natural gas price at the U.S. benchmark Henry Hub fell 34%, or $1.12 per million British thermal units (MMBtu), to $2.18/MMBtu between January and June, according to data from Refinitiv Eikon. The Henry Hub price averaged $3.30/MMBtu in January on an inflation-adjusted basis and then dropped below $2.50/MMBtu starting in February. Relatively mild temperatures, record production, and higher-than-average inventories reduced natural gas prices. When adjusted for inflation, this year has seen the lowest average monthly Henry Hub price since June 2020."
For natural gas, we still lean towards the upside but would hedge any long futures positions with some short calls.