If you thought the greatest obstacle to the U.S. economy was climate change, well, think again. Oil prices were trying to bottom but now seem stuck in a trading range as economic readings on jobs were too strong. There was also a stark warning from Atlanta Federal Reserve bank president Raphael Bostic that seemed to suggest that if we are going to fix Inflation, we may have to kill your dreams and ambitions. Ok, he really did not say that, but he might as well have.
What Bostic did say was that:
“the greatest obstacle to the U.S. economy is inflation, and that officials remain determined to beat inflation despite signs and prices are moderating there’s still a lot of work to be done.”
So, in other words, Fed officials were dismayed that the ADP private payrolls jobs report came in much better-than-expected 235,000 in December, and layoffs fell by a whopping 43%. The Fed can’t have that. Heaven forbid!
The Fed needs you to pay the price for all of its missteps on Inflation, believing it was transitory. They also want you to pay the price for all of the massive government spending, money printing, and cash handouts that have actually tightened the labor market, as viewed by the plunging labor participation rate of 62.1% as of November 2022.
That means wages are rising, which is inflationary even as they are failing to keep up with Inflation. The Fed needs you to pay for the increased taxes on energy and business that will be passed onto you in the form of higher prices.
So, what the Fed cannot have is good economic news like job creation or news like the trade deficit decreased 21.0% to $61.5 billion, the lowest level since September 2020, that the commerce department reported yesterday. Darn it! They need a recession, and they need it now!
As Atlanta Federal Reserve bank president Raphael Bostic said Inflation:
“is way too high here in the United States. The Federal Open Market Committee and I remain determined to use our policy tools to bring Inflation back toward our objective.
I appreciate recent reports that include signs of moderating price pressures, but there is still much work to do. “
And it is the American people that end up paying the price.
While the macro fears and warm weather are crushing oil, the realities are that despite all of this talk of slowing demand, which is happening due to higher rates and warm weather, the reality is if you look at the big picture, supplies are still way too tight. They will get even tighter if normal weather returns and will spike as China revs up from covid lockdowns.
Consider yesterday’s Energy Information Administration (EIA) Petroleum Status Report, which was impacted by winter weather but still shows supplies are way too tight. We can start with the number that was not impacted by the weather, and that was the Strategic Petroleum Reserve (SPR) release of 2.7 million barrels. That left the reserve at 372.38 million barrels, the lowest level since 1983. So now, when you consider that there are only about 2 million barrels more to go from Bidens 180-million barrel release, now for crude draws, the fun is only starting to begin.
While the Energy Information Administration reported that the implied demand for oil fell to its lowest level since 1990, if you look through the polar vortex and the snow, what we see is that the demand is actually better than it looked.
Market watcher Tim Dallinger pointed out that crude built 1.7 MMB, including 2.7 MMB of SPR release. Refineries processed 2.3 MMBD of crude less week-on-week. There were likely some refinery outages due to abnormally cold weather throughout the country, including the Gulf coast refining complex.
However, that alone cannot account for refineries processing 16.1 MMB less crude. There is likely some optimization of product inventories on December 31, such that taxes are deferred a year. Next week should see a significant return of crude processing.
He pointed out that 2022 Crude inventories finish the year at nearly identical levels as 2021. Yet if SPR is included, crude inventories have cratered. He added that U.S. exports remain high. 2022 saw a record weekly export volume of 3.5 MMBD. SPR barrels were exported over the past year to keep the globe supplied with oil. With the SPR release effectively over, U.S. exports should moderate. If they remain as high as 2022, U.S. crude inventories will fall at a rapid pace.
Bloomberg news that, “Colonial Pipeline Co. halted operations on a critical conduit that supplies fuel to the U.S. Northeast, the latest disruption to energy flows following an outage on the Keystone oil pipeline last month. Some product was released at Colonial’s Witt booster station near Danville, Virginia, prompting the shutdown of its Line 3 Tuesday, spokeswoman Meredith Stone said in an email. She said that the company is planning a restart at around 12 p.m. Eastern time on Saturday. The company said an equipment failure had resulted in the leak, and this was being repaired.
This could impact products that were bullish based on the EIA report. The EIA reported that distillate fuel inventories decreased by 1.4 million barrels last week and are about 14% below the five-year average for this time of year. This comes as we are getting warnings of supply tightness for products from Phillps 66.
Reuters reported that refiners have been running at near full capacity for months as demand for gasoline and diesel roared back as pandemic travel restrictions ended and Europe sought alternatives to Russian fuel exports. U.S. processing plants were forecast to operate at about 93% of capacity in the fourth quarter and have been running in excess of 90% since March, according to U.S. data.
Globally, there has been a loss of about 4.7 million barrels per day of processing capacity, said Jeff Dietert, a Phillips 66 vice president. As demand recovered, less capacity has driven up refiners’ profit margins and utilization rates. he said:
“Last summer, we saw demand back close to 2019 levels and saw margins, frankly, I didn’t think we’d see and hadn’t seen historically,” said Dietert. “As we approach the summer driving season, we expect gasoline and diesel to be tight again this summer.”
Reuters says that another U.S. refinery, Lyondell Basell Industries LYB.N’s 263,776 barrel-per-day (bpd) Houston refinery, is scheduled to close by the end of this year, further reducing U.S. capacity. The loss will be mitigated by the planned expansion of Exxon Mobil Corp's (NYSE:XOM) Beaumont, Texas refinery’s coming on-line. It could add about 250,000 bpd capacity. Phillips 66 (NYSE:PSX) Chief Executive Mark Lashier said the Houston-based company is working to better integrate its seven U.S. refineries.
Lashier said:
“We want to standardize the way we run our refinery business, we want to optimize across the platforms, technologies that we’ve put in place will enable that. We really think it’s the way to position ourselves competitively.
We want to standardize the way we run our refinery business, we want to optimize across the platforms, technologies that we’ve put in place will enable that. We really think it’s the way to position ourselves competitively.”
The EIA said that gasoline inventories decreased by 0.3 million barrels from last week and are about 6% below the five-year average for this time of year. Not very comforting.
Natural gas plummets on warm-up and LNG news. Freeport LNG has provided an update on the timing of the initial restart of its liquefaction facility. The company continues to make notable progress on its path toward the restart of liquefaction operations.
As of December 23 2022, the reconstruction work necessary to commence initial operations is substantially complete, and the company is submitting responses to the last remaining questions included in the Federal Energy Regulatory Commission’s December 12 data request.
Given the time needed for the regulatory agencies to review the company’s responses and to seek any necessary clarification, Freeport LNG now does not anticipate commencing the initial restart of its liquefaction facility until the second half of January 2023.