While oil prices get crushed on warm weather and fears of a Federal Reserve-inspired recession, the big picture for fossil fuels looks very bullish. The lack of investment in fossil fuels is a major long-term issue even as we see this massive sell-off to start the New Year. The short-term focus is on a recession and a drop in oil demand, but really that is being overplayed.
The real story for oil is the lack of investment that is going to leave the globe long-term undersupplied. A historic first Investment in green energy eclipsed that of fossil fuel for the first time in history.
Bloomberg News reported that roughly $580 billion was arranged in 2022 for renewable energy and other environmentally responsible ventures, while the oil, gas, and coal industries turned to lenders and underwriters for closer to $530 billion, according to data compiled by Bloomberg. And while environmentalists may cheer that fact, what they won’t cheer is energy shortages that will come in the future.
In Europe, recent drops in natural gas prices due to miraculously warm weather do not mean the energy crisis in Europe is solved. While many prayers so far have been answered, I am not so sure we should continue to put the good Lord to the test.
Oil Price reports that in December, the International Energy Agency warned that Europe could face a gas shortage this year despite its successful efforts to fill up storage for winter 2022-23. Now, more voices are joining the warnings as reality sets in, and it is not a reality that one can easily brush aside.
For starters, much of Europe’s success in keeping the lights on so far this winter has been the result of milder-than-usual weather. October and half of November were particularly warm, which made reducing gas consumption across the European Union—a mandatory directive—much easier than it would have been otherwise.
Yet, the moment the weather got colder in late November, consumption jumped. So in early December, Germany’s head of energy market regulations had to warn Germans to take it easy on the heating as they were not hitting the country’s gas savings target of 20 percent of total consumption. That warning gave everyone a taste of just how precarious the situation currently is. Storage units are full, and there’s more LNG coming into European terminals all the time, thanks to the mild winter weather, according to Oil Price.
Here in the US, markets are really focused on the Federal Reserve and the warm temperatures that we’re having here. The American Petroleum Institute report that was skewered by winter storms said that crude supplies rose by 3.298 million barrels. The American Petroleum Institute said that US API distillate stocks were down 2.4 million barrels gasoline supplies were up 1.2 million barrels. Yet does anybody really care after the storm shut down production and refineries?
The Fed minutes didn’t really inspire confidence either for oil traders that the US could avoid a recession. In the report, Fed officials made it very clear that further interest rate increases would be necessary and also made it clear that we will not see any reversal of that policy or any cuts in interest rates. So, what they’re saying is that even if the economy suffers, that’s a steep drop, and even though there are many signs that inflation has peaked, the Fed is hell-bent on regaining its credibility even if it means economic pain for millions of Americans.
Oil bulls, in the short term, are fighting two very powerful forces, Mother Nature and the Federal Reserve. I believe that some of this New Year’s collapse is really based on the sharp turnaround in the weather. We went from a polar vortex to forecasts that suggest that winter is going to be over, at least until the middle of the month. The reality, though, is that Strategic Petroleum Reserve releases are going to be ending. China is going to reopen, and demand will rise in the coming months. winter may or may not return, but if it does, for the forecast changes, we will see a sharp rebound in prices.
Today we should recover assuming that today’s Energy Information Administration “Petroleum Status Report” shows similar data to the API. Technically, there is the possibility of a retest of $70.00 a barrel.
We would assume that that area should hold very strongly. We assume that we are getting very close to a low of what may be a new trading range in the short term, with the low side being near $70.00 a barrel and the high side being near $80.00. It also is a good time to start thinking about buying calls at the back end of the curve, as the recent sell-off is making them look very attractive to long-term investors.
Natural gas is extremely oversold. It’s trying to bounce off oversold levels, but it’s struggling. While this week’s withdrawal should be an impressive 233 BCF, next week is going to be incredibly small.