Bullish bets on crude oil have hit a two-year low. It’s the bulls that have run for the exit and are nowhere to be found. The running and hiding of the bulls might be the perfect opportunity to start getting long because the outlook for oil continues to be one of undersupply.
Oh sure, we can be fearful of this recession. Yet the problem is that last week’s blockbuster jobs number flew in the face of those that are predicting a deep recession. Non-farm payrolls came out with an increase of 528,000, much more than the 250,000 jobs that were predicted. We also saw the unemployment rate fall from 3.6% to 3.5%, and average hourly earnings did increase to 5.2% versus 4.9%. While that doesn’t keep up with inflation, it definitely was a step in the right direction. Just in case you’re worried about inflation, and that’s a concern. So let us get this straight. Oil traders crushed oil in the first week of August because they were fearful that the market was already in a recession. At the end of the week, we get this blockbuster jobs number, and now oil traders are selling off because they’re fearful of rising interest rates to cool a red-hot economy. Oil traders need to make up their minds.
We know that oil demand in China is about 4% below what it was a year ago because of COVID lockdowns. Yet there are signs that could change. Not only has Saudi Arabia raised selling prices to Asia, but Reuters also reports that demand in China and India is rising. Reuters says that spot prices for Russia’s key export crude grade ESPO Blend to Asia have rebounded from all-time lows amid strong demand from top buyers India and China and easing concerns about sanctions, several traders said. The crude exported from the Pacific port of Kozmino saw its spot differentials dive from premiums to a record discount of more than $20 a barrel in March as western sanctions were slapped on Russian financial and energy companies following the country’s invasion of Ukraine.
We can be fearful that the Biden administration's new inflation reduction act may cause a recession. Higher corporate taxes do not encourage growth and make those companies less competitive with companies in places like China. When you spend more money and look to pay for it by increasing taxes and militarizing the IRS, it does not raise confidence from the market, but they know what they’re doing. The White House claims that this bill is going to lower energy costs, but there’s nothing in this bill that we see that will lower energy costs.
What may be the first sign that the Biden administration’s intervention in the oil market may backfire by reducing the incentive for oil producers to invest and increase production is starting to show up in the weekly Baker Hughes RIG Count. Oil Price wrote that the number of total active drilling rigs in the United States fell by three this week, according to new data from Baker Hughes published on Friday. The total rig count fell to 764 this week—273 rigs higher than the rig count this time in 2021. Oil rigs in the United States fell by seven this week to 598. Gas rigs rose by 4, to 161. Miscellaneous rigs held steady at 5. The rig count in the Permian Basin fell by 4 to 347 this week. Rigs in the Eagle Ford stayed the same at 72. Oil and gas rigs in the Permian are 104 above where they were this time last year. Primary Vision’s Frac Spread Count, an estimate of the number of crews completing unfinished wells—a more frugal use of finances than drilling new wells—rose to 295 for the week ending July 29, compared to 239 a year ago. Crude oil production in the United States stayed the same at 12.1 million bpd in the week ending July 29, according to the latest EIA data.
The problem that we see with the SPR release is that it’s going to offer some short-term relief to prices, but over the long run, it’s going to discourage much-needed investment in oil production that’s going to leave the market undersupplied. I think the market could read too much into the weak action we’ve seen over the dog days of summer, but we see some value in oil and products at these levels. This week the expectations are that we will see an increase in crude supplies because exports more than likely fell. Get it the same time, expectations should be the gasoline demand that plummeted in last week’s report should rebound in a big way. We still believe that there is significant upside risk for prices later this year and going into next year, so we would recommend that you use this weakness to put on those bullish strategies.
The Washington Post had a rare moment of clarity and truth in a stunning admission surrounding natural gas that needs to be noted. The Post wrote, “The fundamental issue is that, at current margins, natural gas is a better option than many environmentalists would care to admit. That’s not because the gas itself is clean (though it is cleaner than coal and oil), but because it nicely complements renewable wind and solar power. Technological progress has made these sources of power cheap on a per-kilowatt-hour basis — when the sun is shining, or the wind is blowing and when the panels or turbines are optimally placed for sunshine or wind. Gas plants have the convenient property of being easy to turn on and off. So, a grid with plenty of gas attached to it can run mostly from wind and sunshine, with gas being provided on calm or cloudy days to ensure reliability. This mix of cheaper-than-ever renewables with cheap gas helped bring about large reductions in American CO2 emissions over the past 15 years, helping to drive many coal plants out of business and making the air much cleaner, said the Post.
Maybe the Post should point out the fact that the United States and because of the shale revolution and their production of natural gas, reduced greenhouse gas emissions by a larger amount than any industrialized economy on the earth. They did that before they were in the Paris climate accord. Now, if the Post really wants to do some good work, they should look into the slave labor in the Congo that is being forced to mine lithium for electric cars and cell phone batteries.