Jerome Powell hints: You can’t hurry cuts. No, you’ll just have to wait. Inflations not easing, But It’s a game of give and take. You can’t hurry cuts, no, you just got to wait, just trust in the Fed’s time, it’s a game of interest rates. How many heartaches must we stand before inflation’s so tame to let us live again. Rate cuts were the only thing that kept us hanging on. When I feel my paycheck, you know it’s almost gone. No, you can’t hurry cuts….
Well after trying to hold support for days, the market had the rug pulled out from underneath it as the market seemed to lose the Fed and the Strategic Petroleum Reserve (SPR) put in quick succession. Backing off rate cuts and the Biden administration switching to a potential seller from a buyer for the SPR took away the invisible floor that oil had. We also saw an easing of war premium in part because of an Axios report that said that Israel considered a retaliatory strike against Iran on Monday but decided to wait.
The market also was less than inspired by the weekly Energy Information Administration (EIA) status report that seemed to suggest the gasoline demand in the United States is struggling but at the same time so are the inventories of oil products. Yet the tightness of diesel supply and gasoline, especially in certain parts of the country, seem to be overshadowed as the market tries to reprice oil and gas in an environment where we might not get any rate cuts this year after all and perhaps a measured response to Iran’s unprecedented attack on Israel.
Federal Reserve Bank of Cleveland President Loretta Mester seemed to echo the sentiment from Fed Chair Jerome Powell by saying monetary policy is in a good place, adding that the central bank shouldn’t be in a hurry to cut interest rates. Yet by backing off the suggestion that rate cuts would be coming, it took away what some might say was the Fed oil put that would keep a floor under oil just a day after the Biden administration took away the Strategic Petroleum Reserve put by saying that instead of buying back for the reserve they might be selling.
Add to that its seems that the market believes that the Biden administration will not impose sanctions on Iranian oil because they fear a shortage. Even so called reimposition of oil sanctions on Venezuela will not impact their exports to the US ahead of the election. Bloomberg News reports they intend to reimpose oil sanctions on Venezuela, ending a six-month reprieve, if Nicolas Maduro’s regime does not take steps in the next two days to honor an agreement to allow a fairer vote in elections scheduled for July.
The US plans to allow a Treasury Department license permitting oil and gas production to expire without renewal on Thursday, according to people familiar with the plan, who asked not to be identified without permission to speak publicly if Venezuela fails to act. Sounds ominous but as oil analyst Anas Alhajji points out, the reimposition of sanctions will not cover Venezuela’s oil exports nor U.S. oil imports from Venezuela. So, while the Biden administration is trying to act tough protecting free and fair elections, they are more worried about the price of oil and diesel hurting their reelection chances.
In fact, John Kemp at Reuters pointed out that Brent crude oil calendar spreads have continued to soften as traders downgrade the probability the conflict between Iran and Israel will escalate to the point where it disrupts oil production and exports. The spread from June to December 2024 has fallen to its lowest for more than five weeks. Most of the softening has come in the nearest-to-deliver June-July and July-August spreads where most of the speculative money is concentrated and where the supply-demand balance would be impacted most immediately by any escalation that threatened oil production and exports from the Persian Gulf. Traders have concluded Iran will not risk any disruption of its exports; the United States will not risk higher oil prices in an election year; and the United States will restrain the next round of responses by Israel. Then again, if it does happen, well, stay tuned.
How about gasoline futures which in recent days has been surging also saw the bottom drop out after the Energy Information Agency {EIA) report. The market became concerned about the strength of the consumer after another week of subpar 8.862 million barrels a day demand. Even though it was stronger than the week before, the market is concerned that this summer driving season might not be getting off to a bang-up start.
We did see a big rebound in U.S. oil exports that surged to a whopping 4.726 million barrels a day, which probably included some post-Easter Holiday work. Then I would have to say that the report really wasn’t bearish. In fact, I would suggest you could even see green shoots in this report that would suggest more bullishness in the weeks to come. Yet when we lost the Fed put and with the market taking off some more premium, we started the see people’s online positions after they took out support.
According to the EIA, demand in the four-week moving average, which is really what you must keep an eye on, showed that based on total products supplied over the last four-week period averaged 19.8 million barrels a day, down by 0.2% from the same period last year. Over the past four weeks, motor gasoline products supplied averaged 8.8 million barrels a day, down by 1.9% from the same period last year. Distillate fuel product supplied averaged 3.5 million barrels a day over the past four weeks, down by 8.4% from the same period last year. Jet fuel product supplied was up 0.8% compared with the same four-week period last year.
EIA said supplies of U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.7 million barrels from the previous week. At 460.0 million barrels, putting crude oil inventories are about 1% below the five-year average for this time of year. Total motor gasoline inventories decreased by 1.2 million barrels from last week and are about 4% below the five-year average for this time of year. Finished gasoline inventories increased, while blending components inventories decreased last week. Distillate fuel inventories decreased by 2.8 million barrels last week and are about 7% below the five-year average for this time of year.
After taking off support both oil and products are vulnerable from a price standpoint. There is still geopolitical risk in the marketplace even though it’s been downplayed in the short term. If the demand side of the equation bounces back just a little bit, we can see by the inventories that supplies will tighten significantly. And while right now we are vulnerable to see oil retest near $80.00 a barrel, we believe it would be prudent to put on some call positions on breaks.
Gas producers are praying that today’s natural gas inventory report will throw them a lifeline so they can survive another week. The U.S. likely saw a below-average build in natural gas inventories last week, lowering slightly the storage surplus as the injection season gets underway, according to a survey by The Wall Street Journal. Natural gas in underground storage is expected to have increased by 45 billion cubic feet to 2,328 Bcf as of April 12, according to the average estimate of nine traders, brokers, and analysts. Estimates range from a storage increase of 39 Bcf to one of 51 Bcf.t Journal writes that “the EIA is scheduled to report last week’s storage levels on Thursday at 10:30 a.m. EDT. The projected rise is smaller than the five-year average injection for the week of 61 Bcf and would reduce the surplus from 633 Bcf the week before. The large surplus over the five-year average follows an unusually mild winter that limited inventory drawdowns. The U.S. Energy Information Administration estimates that natural gas in storage will end the injection season at a record 4,120 Bcf, or 10% above the five-year average.