The petroleum markets that have crashed despite data showing robust demand and tight supply should be a flashing caution light for Federal Reserve Chairman Jerome Powell as he heads towards Jackson Hole Symposium.
We can go over the current state of US demand where we see some warning signs that while the consumers are holding up the manufacturing and trucking sectors are slowing.
Distillate demand numbers averaged 3.6 million barrels a day over the past four weeks, down by 5.0% from a year ago and that is raising some red flags.
Yet based on total demand we are still averaging an impressive 20.4 million barrels of oil per day and gasoline demand came in at a near record 9.913 million barrels last week which is amazing considering the Biden Administration speding billions on electric car subsidies does not seem to be making a dent in gasoline demand.
Maybe because they never asked the consumer whether they wanted them. Sort of like the Democratic nominee Kamala Harris, the voters never said they wanted her, but they just shoved her down your throat like they did electric cars.
Is it any surprise that Ford (NYSE:F) announced that it was canceling its electric three-row SUV and delaying the launch of a new electric pickup truck until 2027. Now Ford says it won’t release any new electric vehicles until it can ensure profitability on the models within the first year of launch.
Oil sold off because the Bureau of Labor Statistics lied to us. Oil sold off because they know they cannot trust the government.
Yet oil also was caught up in the unwinding of the Yen carry trade because oil, like gold, is like real money.’
Jeff Currie, the famed former Goldman Sachs energy analyst said that oil was the unwinding of the ‘oil carry trade.' He explained that traders would borrow paper/physical barrels, and convert into USD, and invest in US treasuries.
He said that that move “squares a record weak financial oil market against a tight fundamental oil market, as the market is liquidating both physical and financial barrels for US dollars.”
He said, “strong USD and attractive risk-free rate of 5.5% = overall weak financial demand for commodities. He warns, “Potential for sharp unwind like what happened with Japanese Yen a few weeks ago with Fed cut in September/turn in the rate cycle."
Jeff Curries also told Barrons that it might be time to go green again. He said that lean energy is one of the most rate-sensitive sectors in the global economy.
The peak in clean energy occurred when rates were at 0%. Since rates have moved up, the pendulum has swung back toward traditional energy.
If you think the Fed is going to start cutting rates, it will swing back toward clean energy again, so you’d want to be a buyer of clean energy here. The clean energy sector looks attractive today.
So that brings us back full circle to Jerome Powell and his speech at 10 am Eastern time. We know that Jerome Powell will signal that we will cut rates in September, but the key is whether they’re going to do a quarter or 50 basis points.
The other key is if he’s going to signal how aggressive he will be in cutting rates in the future. We may see some more shakedown as the Bank of Japan continues to suggest that their rates are going up as they unwind from their policies of negative interest rates that hobbled their economies for a generation.
In the meantime, the selloff in products is bringing down gasoline prices even in the Midwest. Wavering EPA regulations seem to suggest that lower gas price becomes a political party so you can ignore the eventual threat of climate change for a while
The EIA said that A series of refinery outages in Chicago and Ohio have generally increased Midwest prices for petroleum products relative to the U.S. average, particularly gasoline. The outages reflect an unusual decline in refining activity near the end of the high-demand summer season and have drawn down regional inventories.
On July 15, ExxonMobil’s Joliet refinery outside of Chicago, with 251,800 barrels per day (b/d) of capacity, was shut down on an emergency basis in response to a power outage brought on by severe weather conditions. The shutdown took the refinery offline for several weeks before it could safely resume operations.
Operators reported they had begun bringing the facility back online as of August 8, and later reports have since indicated that the Joliet facility has resumed normal operations. In Ohio, operators also reported temporary unit shutdowns at Cenovus’s 183,000-b/d Lima and 150,800-b/d Toledo refineries.
Since the week ending July 12, just before the Joliet outage, to August 9, Midwest refinery utilization decreased 11 percentage points to 86% because of the outages, reducing refinery production of gasoline, diesel, and other refined petroleum products. As these refineries reentered service, Midwest refinery utilization increased more than 10 percentage points the following week, to 97% as of August 16.
So, after it’s all said and done if the Fed decides that we are gonna cut rates more than likely oil will hit the lower end of its trading range.
The expectations built into the market of a slowdown in the economy are probably overstated somewhat because the diesel demand numbers were somewhat of an influx.
There is no doubt the concerns about the global manufacturing sector slowdown are the number one negative factor on oil prices. Yet these worries come even as global oil demand is at an all-time high and daily oil production can’t keep up.
Geo-political risk factors are still high. The Houthi Rebels are still hitting tankers in the Red Sea and US bases are in high alert. A report overnight that Nato Airbase Geilenkirchen Germany was on high alert due to ‘potential threat”.