Oil prices are struggling as a crisis of confidence in the global banking system is overshadowing what normally would be very bullish fundamentals. The fear is that fear will lock up the economy, reversing the signs of strong demand and a looming tightness of supply. Oil prices are struggling as a crisis of confidence could cause business to retract on fears of available capital. There is, at the same time, perhaps a pullback in oil production as oil drillers fear the uncertain future.
The emergency sale of Credit Suisse Bank by UBS raised more questions than answers in regards to the low price that UBS paid and the fact that Credit Suisse said that 16 billion Swiss francs ($17.24 billion) of its additional Tier 1 debt will be written down to zero. It is not helpful that the ECB Governing Council member Martins Kazaks said that the ECB is not done increasing interest rates.
Yet now reports come that Goldman Sachs expects that the Federal Reserve will pause at its March meeting this week because of stress in the banking system. JP Morgan on the other side sees that the Fed is going to go ahead with their 25-basis point increase on Wednesday. In the UK the Bank of England fully priced in a 25 basis point cut by the end of the year for the first time in four weeks. The Fed meeting this week will be critical especially because the Federal Reserve and their credibility has just taken a huge hit, especially in light of the turmoil in the banking sector. There is also a lack of confidence that the Biden administration has a handle on how to control this unwinding confidence.
On a normal day the market most likely would be focused on demand expectations reports. The Energy Information Administration reported that they expect the global oil demand will average 102.02 million barrels a day for 2023 and that is 2.0 million barrels a day higher than the average in 2022. The International Energy Agency (IEA) expects global oil demand to rise by 3.2 million barrels a day in the first quarter of 2023 to the fourth quarter of 2023. If these demand expectations come true, we are going to face a supply shortage later this year. Of course we don’t know if that’s going happen if the global economy comes off the rails.
I believe that this banking crisis is more a crisis of confidence than any underlying problems with the banks and if that’s the case, then oil is probably a great buy on these dips. On the other hand, if you think the global economy is going to come off the rails and collapse then you need to stand aside.
It’s clear that the Fed has broken things in the global banking system. The tough talk by Fed chairman Jerome Powell prior to the banking crisis unraveling in front of Congress, makes him look out of touch and he really backed himself into a deep corner. The problem is that fear can be greater than reality especially when the Fed has been so wrong on inflation. We are seeing the risk aversion trade as traders flocked to treasury bonds, gold and Bitcoin but running from oil. And if we want to focus on supply and demand for just a little bit, it looks like we’re going to have a substantial drawdown in both crude oil and products this week. We expect the crude supplies will fall by 2.5 million barrels this week we should see another big drop in gasoline inventories of close to 3.0 million barrels and distilling inventories down by 2.5 million barrels.
Amena Bakr is reporting that Kuwait oil company declares a state of emergency due to an oil spill in the West of the country. So far they say production is not affected according to the statement coming out of Kuwait.
Reuters is reporting that Russia is China’s top crude supplier for the period January and February. Their volumes have been up a whopping 23.8%. One of the good things about the global financial crisis is that the price cap that Europe put in place will not be challenged anytime soon until the banking crisis goes away.
Oil products are also getting support from the ongoing strike in France. Shipments of refined product from Total Energies has stopped and the strike is going to further tighten global supplies of diesel and gasoline. The market is not paying as much attention to it as they normally would be because of the ongoing financial meltdown due to the banking crisis of confidence.
The market is still going to be very nervous trading. You can’t really look at the fundamentals but have to look at fear and technical charts. Long-term players should be using the weakness to put on long-term bullish option strategies because our sense is that when the dust settles from this banking crisis, we’re going to have a shortage of oil and gas.
Spring may be coming but nobody told the natural gas market. Natural gas is getting a boost on weather-driven demand as the heaters go on as temperatures fall. Look for natural gas to be range bound a bit but they do have an upward bias as LNG exports start to pick up.