The oil market seems out of whack – with other risk assets as well with the bullish underlying fundamentals. One reason given for the dramatic fall in oil prices yesterday is the fact that OPEC in its Monthly Oil Market Report (MOMR) warned that the oil market “faces considerable uncertainties.” And while that is a bold statement, the reality is that based on its own data, the oil market is tighter than it has been in more than a decade.
OPEC revised its 2022 and 2023 oil demand growth forecasts lower by 100,000 barrels per day (bpd) to average 99.6 million bpd this year. Yet, it sees global oil demand growth at 2.5 million bpd in 2022, down 400,000 barrels per day. While that may sound a bit bearish, it also means it is unlikely that OPEC will raise output. In fact, it may be laying the groundwork for another oil production cut. It also makes you wonder whether the globe has enough spare capacity to meet that demand.
Even the International Energy Agency in its monthly report is warning about tight global oil supplies. The IEA said, “Global observed inventories fell by 14.2 mb in September as OECD and non-OECD stocks plunged by 45.5 mb and 19.3 mb, respectively, but were partially offset by a surge in oil on the water of 50.6 mb. OECD industry oil stocks declined by 8 million barrels, while government stocks drew by 37.4 mb. OECD total oil stocks fell below 4 000 mb for the first time since 2004."
The question we must ask ourselves is if demand is so bad, why are global oil inventories so low? The IEA actually raised its demand forecast higher anticipating an increase now of 2.1 million barrel a day, up from 1.9 million barrels a day last month.
We keep hearing that demand is low because of the COVID lockdowns in China and the slowing economy, but when you look at the hard numbers, you would assume that that would mean that oil supplies would be rising not falling. Supplies are still falling even as the Biden administration has released a record amount of oil from our Strategic Petroleum Reserve (SPR). Last week the SPR release was 4.1 million barrels from the reserve. That means that of the 180 million barrels promised by the Biden administration a total of 157.9 million barrels have been released, leaving another 22.1 million barrels to be let out. For the entire year, they have released a total of 201.6 million barrels, leaving the SPR supply at just 392.1 million barrels.
Based on this data, it is almost stunning to see oil prices act so weak. Yet, we seem to be playing a bit of a technical range game, and the market found some air pockets below. We are still getting tough talk from the Fed, yet the dollar is weakening today after a bit of strength yesterday. The dollar is looking toppy as we have fallen below some key support levels.
The International Energy Agency (IEA) is still bullish on diesel prices and warning that only high prices might cure high prices. The IEA says that, “High diesel prices are fuelling inflation, adding pressure on the global economy and world oil demand, which is now expected to contract by 240 kb/d in 4Q22. Demand is forecast to expand by 2.1 mb/d in 2022 before slowing to 1.6 mb/d next year. The IEA said that, “Diesel markets were already in deficit before Russia’s invasion of Ukraine due to the closure of 3.5 mb/d refinery distillation capacity.
The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the U.S., Middle East and India away from their traditional buyers. Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear.
Tonight, we get the American Petroleum Institute (API), which should show another drawdown in crude oil supplies despite the SPR. Product should also remain tight and that should give the market some support.
Natural gas is playing Freeport LNG bingo! One of the major downward forces in U.S. natural gas prices has been the problems with the Freeport LNG export terminal. In recent days, natural gas prices have flip flopped amid conflicting reports surrounding the restart of the beleaguered Freeport LNG terminal. Last week there were fake tweets by people purporting to be Freeport LNG. Those were denied by the company, but the lack of new information coming from Freeport LNG is keeping the market guessing. The company confirmed that reports of a cracked pipe on Twitter were false.
Reuters said that, “U.S. natural gas futures edged up about 1% on Monday, paring earlier gains of over 8%, on expectations that Freeport LNG will delay the restart of its liquefied natural gas (LNG) export plant in Texas from November to December. In addition to price swings due to Freeport, traders said futures soared earlier in the session due to forecasts for colder weather and higher heating demand than previously expected through the end of November."