Inflation is not transitory but perhaps the Omicron variant of the COVID-19 virus is. The oil markets crashed on Omicron virus fears. Some think it may have been legitimate, but someone forgot to warn US drivers.
The Energy Information Administration (EIA) showed blockbuster demand for products yesterday and a big drawdown on crude supply suggesting that the Omicron fears that have permeated the marketplace since Thanksgiving Day have been way overstated.
On top of that, oil is rallying on the fact that the Fed announcement is now behind us and even though the Fed was hawkish, the reality is that they had signaled that they would be and despite what you read, the hawkishness was not as bad as expected.
The Fed Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. Beginning in January the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
The Fed also signaled 3 rate hikes next year. So, with the market's biggest fears now in the rearview mirror, it appears that we're seeing a nice bout of risk-on trading that is hitting not only the oil market, but a lot of commodities across the board.
Yesterday morning copper got crushed. China demand was terrible and gave bad data and default fears. But now the markets are even looking beyond that. Copper is making a strong recovery after a big break yesterday. Lumber futures are also through the roof. The Biden administration re-established Trump tariffs on lumber and explosive demand in the US for building materials, yet it is the petroleum market recovery that should excite most of my readers.
The EIA data was, as I expected, extremely bullish. The headline crude draw came in at 4.6 million barrels! A very big draw considering that it would have been larger except for a 2 million barrel release from the SPR back into commercial inventory. That puts crude supply about 7% below the five-year average for this time of year.
The break in gasoline price seemed to have a very positive effect on US gasoline demand. It surged last week to 9.472 million barrels a day, a pretty incredible number for this time of year and suggests that there is underlying strength. We know that the higher gasoline prices have hurt many of the poor and middle class and that is why the Biden administration is so desperately trying to deflect blame for higher gasoline prices by pointing fingers at OPEC and the U.S. energy industry, as well as the man on the moon.
Gasoline inventories were down by 700,000 barrels and they are 6% below the five-year average for this time of year. Distillate demand also was strong last week and distillate fuel inventories fell and are 9% below the five-year average for this time of year. The other concern for heating bills is propane which still is 15.9% below the average for this time of year.
It's time to play weather model roulette! Natural gas prices are bouncing back as the possibility for cold go up after they went down and now back up again. Crazy weather is keeping the weather models off-kilter and causing some big moves. We are also getting some short-covering ahead of the inventory report that should show an 83 BCF draw today.