Is the petroleum market going into a deep economic slowdown? If you look at the stock market, things don’t look that bad. Do you believe the stock market at this point or do you believe the petroleum market?
Petroleum markets may need some serotonin or something to shake out of their pessimism with the fixation on demand and fears oversupply may be the markets undoing. The stock market is doing better and inflation pressures easing as food prices drop. Perhaps today’s big unemployment report will shed more light on which direction we are going to go.
The petroleum markets are still reeling over that 7% weekly drop in gasoline demand even though almost everybody realizes that number will be adjusted to the upside in the coming weeks. One of the best explanations for the massive drop in gasoline demand wasn’t because consumers started to slow down purchases but because of actions by wholesale gas buyers. Sharply falling wholesale prices caused commercial buyers of gasoline to hold off on purchases and instead bought the minimum amount that they could buy in the hopes that they could buy gasoline cheaper in the new week. The wholesale buyers bet paid off but because their inventories were low, they’re going to probably have to buy more gasoline at that lower price next week.
Reuters reported that global food prices fell for the fourth month running in July, according to the UN Food and Agriculture Organization’s price index, but they are still +13% higher than in the same month in 2021. Yet, if they believe prices are still going lower, they may continue to buy less supply, but they are playing with fire as prices generally shoot higher after Aug. 16.
Regardless of that situation, market action in the first two weeks of August has been horrid. As I have pointed out before, the first two weeks of August do show weakness in the petroleum sector, but it normally rebounds in the back half of the month. The reality is that unless demand takes a significant drop from where we are now, we are going to be short of supplies as we head into winter.
Not only do we have geopolitical risk factors that seem to be getting worse as reports that China’s relations with the U.S. are souring. China announced it would halt cooperation with the U.S. in several areas following U.S. House Speaker Nancy Pelosi’s trip to Taiwan, including working-level talks on climate change. China is refusing to join in the climate change charge so the planet is doomed anyway. What do we have to worry about? It must be a real bummer because President Joe Biden worked so hard to try to pass this bill to save the planet and then China decided to veto it.
There is also Europe exploring using more oil to power its electricity grid this winter. That would be more demand for diesel when globally it’s already in tight supply. As John Kemp from Reuters points out that distillate inventories have declined in 66 of the last 109 weeks. Supply plunged by 65 million barrels since July 2020. That drop wiped out the so-called glut of 45 million barrels accumulated during the COVID shutdown. Distillate supplies are 21 million barrels below 2008 and are at the lowest level for this time of year since 1996.
When you look at the tightness in the market, it’s even causing some contracts to change their specifications. Argus reported that, “The shunning of the Russian Urals in Europe’s spot crude oil market has left a hole in supply, and also in price identification. To fill the gap, we have launched Argus Brent Sour – a new index that will help sellers and buyers agree on price levels for heavier sourer grades."
Oil and gasoline are about the most oversold they have been in months. We’re not going to see significant demand deterioration, nor are we going to soon set a significant bottom for the market. Use market weakness to hedge your winter needs.
Natural gas saw a big injection, but supply still looks inadequate. Working gas in storage was 2,457 Bcf as of Friday, July 29, according to EIA estimates. This represents a net increase of 41 Bcf from the previous week. Stocks were 268 Bcf less than last year at this time and 337 Bcf below the five-year average of 2,794 Bcf. At 2,457 Bcf, the total working gas is within the five-year historical range.
The EIA also said that natural gas pipeline exports from the West Texas region of the United States to Mexico averaged 1.6 billion cubic feet per day (Bcf/d) in May 2022—the highest level of pipeline exports from West Texas on record, according to our most recent monthly EIA data. Compared with the 2021 annual average, U.S. pipeline exports from West Texas increased by 12% from January through May 2022 and averaged 1.4 Bcf/d over these five months.