The growing realities of the energy crisis in Europe now has the continent more interested in making the price of oil and gas meltdown as opposed to worrying about the planet melting down because of climate change. West Texas Intermediate oil went into meltdown mode closing below the key support and the Bollinger band for the first time since Dec. 1.
The sell-off on a weak technical setup was inspired by Fed talk and reports from the Wall Street Journal about aggressive interest rate increases along with weak economic data coming out of China. The U.S. dollar shot up close to record highs before pulling back setting a negative tone for many of the commodities markets including oil.
The Wall Street Journal reported yesterday that, “The Federal Reserve appears to be on a path to raise interest rates by another 0.75 percentage point this month in the wake of Chairman Jerome Powell’s public pledge to reduce inflation even if it increases unemployment. Fed officials have done little to push back against market expectations of a third consecutive 0.75-point rate rise in recent public statements and interviews ahead of their Sept. 20-21 policy meeting Investors in interest-rate futures markets saw a roughly 75% probability on Wednesday that the Fed will raise rates by another 0.75 points this month, according to CME Group.”
When that story broke oil prices started to break as well. Other Fed speakers throughout the day seem to hammer home the point that the Fed is on a tightening cycle and that inflation, in their mind, is the enemy and it intends to slay that dragon even if it means pushing the economy into a recession. Reuters reported that, “The high cost of rental accommodation in the United States has not yet fully filtered through to inflation measures, suggesting inflation may still rise further," Cleveland Federal Reserve Bank President Loretta Mester said on Wednesday “I’m not even convinced that inflation’s peaked yet,” Mester said in a webcast with Market News International, saying her focus is on the services sector. “That tends to be much more persistent, and rents are still very elevated and it takes a while for rents to show up in underlying inflation. There’s still more that’s going to show up on that side. I haven’t seen much in the way of suggesting that’s starting to come back down.” Mester repeated that she backs the Fed raising interest rates to 4% by next year.
This tough stance on inflation comes as the Biden administration continues to find new ways to spend money. This morning U.S. Secretary of State Anthony Blinken is announcing another $2 billion in new foreign military financing to aid Ukraine in 18 other countries that are at risk of Russian aggression. There is no word yet as to whether or not they’re going to pay off any of their college loans.
The main fears increased as the European Central Bank might announce its biggest-ever interest rate hike today. Oil traders will await Federal Reserve chair Jerome Powell who is speaking today at the Washington conference.
The market also sold off on signs that the UK will drop a lot of its green energy lunacy and will announce dozens of new North Sea oil and gas exploration licenses as well as drop the ban on fracking. The new UK Prime Minister Liz Truss is going to make UK energy production great again. She says by lifting the ban on fracking, that will get a new supply of natural gas flowing as soon as six months. She also is setting a goal to make the UK a net energy exporter by 2040. That is the exact opposite policy of the Biden administration. Truss is going to launch a review of their net zero-emissions policy and make sure that it’s delivered in a realistic, pro-growth pro-business way. Boy, I wish we had leaders like that in this country.
Instead, we have policy-makers and the U.S. Treasury Department that somehow believe price caps might work for the first time in the history of the world. Talk of price caps did seem to help pressure prices but, in practice, we know that you can’t change the underlying laws of economics. Price caps will lead to shortages and that will lead to higher prices.
Today we get two reports from the Energy Information Administration (EIA) – the natural gas report and the petroleum status report. If it’s anything like yesterday’s American Petroleum Institute (API) report, it should be fairly supportive based on the whisper numbers. The API reported that crude supplies increased by 3.645 million barrels last week. That would have been a 3-million-barrel draw if it weren’t for a 7-million-barrel-plus release from the strategic petroleum reserve.
Gasoline inventories fell by 836,000 barrels in distillate inventories surprisingly built by 1.833 million barrels. The EIA yesterday lowered its demand forecast for next year in its Short-Term Energy outlook, which is also negative. EIA estimates that 99.4 million b/d of petroleum and liquid fuels were consumed globally in August 2022, up by 1.6 million b/d from August 2021. We forecast that global consumption will rise by an average of 2.1 million b/d for all of 2022 and by an average of 2.0 million b/d in 2023. As a result of high natural gas prices globally, we increased our forecast for oil consumption in 4Q 22 and 1Q 23 as electricity providers, particularly in Europe, may switch to oil-based generating fuels. They expect retail gasoline prices will average $3.60 per gallon (gal) in 4Q 22 and $3.61/gal in 2023. Retail diesel prices in our forecast average $4.90/gal in 4Q 22 and $4.28/gal in 2023.
It’s obvious the market action had a big failure yesterday which is going to put us on guard. We have to respect the fact that despite what we believe is the tightest market we’ve seen in years, growth concerns are overtaking current supply tightness realities. That means we may have to be a bit more nimble technically. The breakdown suggests that we could see the movement extend to the downside by another $5 getting oil close to $75 a barrel. Still, if you look at the pattern of the chart we are getting extremely oversold. This is a money game right now. The charts suggest further weakness in the short term. Our long-term outlook has not changed. The market is still undersupplied and there are risks of price shocks going into winter.