Remember all that talk about demand destruction causing a collapse in oil prices? The funny thing about that is the data does not back it up.
The International Energy Agency (IEA), which notoriously has underreported demand in the past, is now saying the global oil demand is going to hit a record high of 102 million barrels a day in 2023. Not only did the IEA talk about record demand but OPEC is talking record demand and raised its global oil demand growth forecast by 20,000 barrels a day for this year to 2.46 million barrels per day. Add to that reports that travel by planes, trains, and automobiles globally will blow away records and that should give the bears pause as they sit in their huge, short position.
US travel hit a record high in September as drivers logged over 276 billion miles on the roads and they are not done yet. We are also getting predictions of record travel over the upcoming Thanksgiving Day holiday. Reuters reported that, “major U.S. airlines and the Transportation Security Administration (TSA) said Monday they expect record air travel over the Thanksgiving holiday air travel period. Airlines for America, an industry group representing American Airlines (NASDAQ:AAL) United Airlines Delta Air Lines (NYSE:DAL), and others, forecasts 29.9 million passengers between Nov. 17-27, an all-time high.
In the US and are seeing data that travel demand in China continues to break records even as their oil demand is supposedly slowing. While domestic air travel demand disappointed some, in China it is still at a 2-year high. This comes as the IEA acknowledges that Chinese oil demand hit a record of 17.1 million barrels of oil a day in September. Given that consuming 17.1 million barrels a day as a slowdown in China, I sure would hate to see the impact on the global market if their economy was hitting on all cylinders. Truth be told, we couldn’t supply the market if that was the case.
So, while oil and its recent crash is overdone and caused mainly by a total reverse in the war risk premium, oil likely has seen the low for the year. We still need to close above the 10-day average to confirm to the computer traders that oil is back in an uptrend. Yesterday the market just missed that confirmation by just a little bit and today the bar is set lower but to turn around the tailspin. We need the algo traders to get their buy signal.
There has been no material impact on supplies due to the war in the Gaza Strip. The market traders have now taken away all risk of any disruption to supply. Yet there are some reports that the Biden administration is cracking down on tanker companies for violations regarding moving Russian oil, yet at the same time continue to allow Iranian oil to flow unfettered.
What price cap? Russia continues to embarrass the world by totally ignoring the $ 60-a-barrel price cap. The Financial Times reports that none of the oil out of Russia is being sold below that magic $ 60-a-barrel price cap.
Now the Biden administration is going to go after tanker companies sending them a letter to cease sending Russian oil, but Russia continues to reap plenty of cash as the price cap as we predicted failed. The US probing 30 ship managers for suspected Russia oil sanctions violations, but that is just a drop in the proverbial buckle.
Tanker Tracker reports there are 600 tankers in the world that regularly violate sanctions, but only 150 are blacklisted by the US Treasury. Their data shows that 140 Dark Fleet tankers have been involved in handling $20bn of Russian oil since the price cap began but only 2 are blacklisted by OFAC.
The market should also see a reversal of last week’s larger-than-expected 12-million-barrel crude build by the American Petroleum Institute (API). On top of that, we will get two weeks of data from the Energy Information Administration (EIA) tomorrow. The EIA is looking to fix problems with their previously reported data. The market eagerly awaits the new data from the Energy Information Administration.
We’ve seen the seasonal drop in gasoline prices and because we came from elevated levels it seems very cheap but historically prices are still very high. Some people argue that when you look at the price of gasoline compared to inflation it’s not that much higher than it was under President Trump. I think they’re missing the point the point. Inflation is much higher than it was under President Trump.
We’ve been talking about getting a hedge for upside risk since we were into the $ 60-a-barrel handle earlier in the year. I believe this recent sell-off in prices is really out of whack with supply and demand. If you’re not hedged this may be your last opportunity. Admittedly we have challenges going forward.
Today we get the consumer price index. A lot of people are freaking out that if we get a hot number, we could see oil prices fall. Yet that might be hard because we have seen a big drop in energy. On the flip side of that, if the inflation number comes in rather muted it could be the catalyst that breaks oil and products out of the recent downtrend.
We have taken out all the war risk premium out of petroleum prices. We still feel there’s going to be growing pressure on world leaders to crack down on bad actors in oil. There is a very modest move by the Biden administration to go after Russian oil tankers, but it’s more due to pressure and embarrassment than it is to shut down Russian oil money. At the same time, the Biden administration continues to turn a blind eye to Iranian oil exports which according to OPEC have risen yet again along with their production.
Natural gas prices turned back up as the weather turned back to cold. Today we’re pulling back a little bit. We still believe that there is an upside risk on natural gas going into winter depending on the weather. If we get a normal winter, people will be shocked as to how high prices might go. If you look at the back end of the curve according to Scott Di Savino, we are pricing in increased LNG exports years down the road.
That’s a problem for another day. In the short term, we will have to see whether we can overcome record US production.