Apparently, global economic leaders are unhappy with the fact that the global economy isn’t in a recession, so they’re doing everything they can to talk us into one. Oil prices got hammered by recession fears and risk aversion.
The International Monetary Fund predicted 1/3 of the global economy was going to be in a recession and that caused people to run to safe havens like gold and silver, U.S. Treasuries, and the dollar. Global investors felt the U.S. economy was the best house in a bad neighborhood. These are the same global leaders that brought inflation upon us with record amounts of money printing around the globe.
Oil prices tried to shake off the IMF warning but couldn’t shake off comments from former New York Fed President William Dudley, who told Bloomberg News that:
“A recession is pretty likely just because of what the Fed has to do. But what’s different this time, I think, is that if we have a recession, it’s going to be a Fed-induced recession, and the Fed can end the recession by subsequently easing monetary policy.”
So, we have that going for us.
Lower prices were hurt further by the incredible turnaround in global temperatures. Not only have we had a warmer-than-normal stretch in Europe, but it also appears that the United States is going to see a warm-up, unlike anything we’ve seen in terms of lack of heating degree days. That is alleviating fears of shortages in Europe but also here in the United States. With ample natural gas supplies in Europe, the potential for fuel switching to oil has gone down dramatically.
At the same time, Biden’s record releases from the Strategic Petroleum Reserve are supposedly coming to an end. The SPR reported that 2.7 million barrels of oil were released, which means that 177.6 million barrels of the 180 million barrels of oil have been released. There are only 2.4 million barrels to go, and it could mean that we will start to see some substantial crude oil draws in the coming weeks. That would be especially true if we start to see the weather get cold at the end of the month, as some people are predicting.
Oil sold off later in the day on a second wave when we saw a report that Venezuelan oil hit a U.S. refinery. The report was Chevron’s first cargo of Venezuelan crude oil after receiving a U.S. license to transport the Pascagoula refinery in Mississippi. This psychologically gave the market more of a pullback, even though we knew that oil was coming last week. Yet we’re bringing in some heavy oil from Venezuela, which is much needed by U.S. refineries. That’s the type of oil that makes diesel and heating fuels which right now we don’t need as much as we thought we would.
On the bullish side, though, it does seem China is moving forward with the reopening of its economy regardless of surging covid cases. Chinese authorities reportedly are discussing a partial end to the Australian coal ban that they put on along with restrictions or bans on imports of barley, seafood and wine, and other commodities. That shift in China probably means that they expect a huge demand increase for power soon, along with demand for other commodities as well. China seeks to stabilize energy prices and ensure supply, according to Chinese television.
It was reported yesterday in a Bloomberg Survey that OPEC production was up 150,000 barrels last month. Most of the rebound was credited to Nigeria. Currently, OPEC output is at 29.14 million barrels a day and is still below its quota.
The oil bulls are fighting not only the Federal Reserve and the international central banks trying to slow down inflation, but at the same time, they’re fighting the weather. We do think that at the end of the day, the barrels are going to matter if China reopens; we should be on the path of significantly tightening supply. We’re not going to see the type of demand destruction the central banks hope they will see. But in the meantime, our best thing to do is to try to enjoy the warm weather while it lasts and use the weakness to put on long-term bullish strategies for oil and diesel for later in the year.
Natural gas got pummeled by the warm-up in temperatures. The market is extremely oversold and could bounce, but the weather forecast really is bearish and is changing concerns from an undersupplied market to an oversupplied market. This comes as the United States is now the world’s leading liquefied natural gas exporter.