I’m the friendly stranger in the black sedan. Won’t you hop inside my car? Beware the Ides of March as the International Energy Agencies’ (IEA) prophecies are questionable and may be a betrayal of their energy security mission.
Global petroleum markets must reassess their outlook after the (IEA) soothsayers had to admit that they once again underestimated demand and overestimated supply. That led to many hedge funds with questionable positions that may have to be liquidated. Now the market must get a handle on just how large the supply deficit is going to get and just how tight supply is going to become. The market must now realize that the possibility of an oil price spike could help derail the Fed rate cut plans. Inflation is still too hot but at the same time, consumers are feeling pain as retail sales start to falter. Faulty data from the IEA led to hedge fund selling in the market and now that they know it’s wrong, must start getting out of bad positions.
US producer prices on a year-over-year basis increased by 1.6%, the biggest move since September 2023 as the cost of goods like gasoline and food surged. Yet the Fed may have a problem not cutting rates as retail sales rose 0.6% last month, less than expected after falling a revised 1.1% in January.
There is talk of a breakout in the Commodity Price Index. Hedge funds that have been betting on lower to sideways markets will have to reassess positions as they have to look at the signs of the times. Bloomberg News reported that, “commodities got sucked into a global short volatility trade. They say that, “Traders are betting against volatility in raw materials prices, countering the commodity sector’s notoriously boom-and-bust history. Whether it’s an oil market that is stuck firmly in a range due to OPEC+ cuts and abundant spare capacity, or copper prices torn between surging renewable demand and strains in more traditional consumption areas, there have been plenty of factors keeping the world’s commodity prices stuck in recent months. Gas volatility is back to where it was before a supply crisis in Europe. It makes for another sector in global markets where one of the most dominant trades has been betting against big swings. Macro volatility has been grinding lower as equities push higher and billions of dollars pour into exchange-traded funds wagering on continued calm.“’
Yet now with the International Energy Agency and OPEC talking about supply deficits and the possibility they could be much larger, the hedge funds may have to cover that could lead to an explosive move not unlike what we saw recently in copper and it could mean sharply higher prices at the pump after the price spike. The Fed will have to reassess their rate cutting schedule. They’re in a tough place because to back off a rate cut going into an election year might be viewed as political so beware the ides of March because the soothsayers have got it wrong.
The Energy Information Administration reported that In 2023, the world produced an estimated 101.8 million barrels per day (b/d) of petroleum and other liquids: mostly crude oil but also lease condensate, natural gas liquids, biofuels, and other liquids from hydrocarbon sources. We expect the global petroleum and other liquids supply to increase by about 0.4 million b/d in 2024 and 2.0 million b/d in 2025. This growth will be driven primarily by rising crude oil production from four countries in the Americas—the United States, Guyana, Canada, and Brazil—which would partially offset near-term voluntary production cuts in 2024 that we expect from countries participating in the OPEC+ agreement.
Collectively, OPEC+ countries accounted for 43% (43.7 million b/d) of global liquids production in 2023. The EIA forecast that OPEC+ petroleum liquids production will fall by 1.0 million b/d this year and then increase by 0.9 million b/d in 2025 after most existing production cuts expire. We assume OPEC+ members will maintain some voluntary production cuts through 2025 to offset slow demand growth. The OPEC+ production targets are based on crude oil volumes rather than all petroleum liquids, and we expect the crude oil portion of production in these countries to decline by 1.1 million b/d in 2024 and then increase by 0.9 million b/d in 2025.
The gasoline crack spread looks like it’s on the verge of breaking out to the upside. Diesel crack is a little bit more subdued. It’s probably time to start putting on those hedges. Natural gas did get a bit of a bounce as more talk of production cutbacks are starting to make the rounds. The huge contango in the natural gas market is giving some hope that there could be some relief down the road. The question is whether that relief comes with increased demand or just lower production. As we recommended before, to be short the front end of the curve along the back has really paid off.