The Energy Report: A Supply Thing
2022.05.04 17:07
All those demand fears of yesterday are quickly forgotten as a supply-side worry is back to center stage. Concerns about China lockdowns, the Fed’s impending decision on what most expect will be a 50 basis point interest rate increase. Even rumors of a possible coup against Russian President Vladimir Putin are being swept under the rug after the American Petroleum Institute (API) report released data that suggested that U.S. oil gasoline and distillate supplies have fallen week over week at an alarming rate.
The API showed not only that crude supplies fell by a more than expected 3.479 million barrels, but distilled supplies fell by a shocking 4.457 million barrels, which are going to drive diesel prices that are already at a record high even further. The supply squeeze on distillate inventories is a major issue, and this inventory number will cause even more distress on the wholesale side of the market. One would expect to see even more volatility than we’ve seen before. The other issue, of course, is gasoline supplies that did not fare any better. The API reported that gasoline supplies fell by 4.5 million barrels. Are we ready for the summer driving season?
Well, we’ll need a little luck, and May 4th be with you.
The other reason that the petroleum markets seem to be less worried about the demand side is that there are reports that Europe is closer to agreeing to a Russian oil export ban before the end of the year. Reuters reported that European Union countries will stop importing Russian oil and refined products, the head of the bloc’s executive European Commission said on Wednesday in proposing the sixth round of sanctions against Moscow for waging war on Ukraine.
Ursula von der Leyen told the European Parliament, prompting applause from lawmakers:
“We will phase out Russian supply of crude oil within six months and refined products by the end of the year. This will be a complete import ban on all Russian oil, seaborne, and pipeline, crude and refined.”
This, I believe, is the right move for Europe, but it’s going to create some supply issues, and because supplies are already tight, that means we’re going to see another round of higher prices. The key question is whether or not Europe can afford to cut off supplies without creating a recession. The other question is can they afford not to consider the state that the world is in. Pope Francis has acknowledged that perhaps NATO poked the Russian bear by breaking agreements about countries joining NATO but perhaps he is doing that to restart peace talks. Now there is no excuse for Putin’s actions in Ukraine. There is a case to be made that he was being surrounded by the West.
China is going to start reopening its economy in a matter of days. There is also an expectation that we will see more stimulus in China that should add to oil demand going forward. Reuters reported that Shanghai authorities helped Tesla (NASDAQ:TSLA) transport over 6,000 workers and carry out necessary disinfection work to reopen its factory last month amid the city’s lockdown, according to a letter that Tesla sent to local officials and seen by Reuters.
The letter, dated May 1st and addressed to local authorities in Shanghai’s Lingang Special Area, outlined the lengths to which the city went to help Tesla, indicating the U.S. automaker’s importance to Shanghai as the city tries to restart business while curbing the spread of COVID-19.
The Fed meeting won’t impact prices today. First, we get the Energy Information Administration inventory report. Make no mistake about it, if the numbers are similar to what we saw from the American Petroleum Institute report this market is going to be very well supported with inventory so far below average, especially in the distillate category, it’s going to be hard to imagine a major price set back. Perhaps the Fed could offset that if they sound a lot more hawkish than they already are. Yet even the Fed might not be able to stop this massive rally with severe deficits on the supply side.
Natural gas prices also surged to the highest level since 2008 on weather concerns and tight supplies. Obviously, pipeline capacity is strained, especially in Appalachia as well as other places. Production has struggled because of cold weather and freeze-offs, and inventories are still below average. Natural gas at $8.00 is high, but if you look throughout the natural gas curve, prices are going up, so we are going to be in a situation where we should see higher natural gas prices this summer.
