So, let’s get this straight. Oil prices were falling on fears that out-out-of-control inflation would cause the Fed to raise interest rates, thereby slowing demand. Then we get a lower-than-expected consumer price index reading showing lower inflation, which in turn makes the dollar fall, and oil prices go back up, adding to inflation. I know, isn’t this fun? One of the main drivers of inflation has been bad energy policy.
Yet, oil prices are rallying not just on the weak inflation number and falling dollar but also on reports that China is looking for ways to reopen its economy from the COVID lockdowns. The post-COVID global petroleum demand recovery has been hampered by China’s zero-tolerance COVID policy. Oil traders know that when China reopens its economy, it will push the world into a global oil demand deficit.
Oil is now surging on that real possibility as the Wall Street Journal reports that China eased pandemic controls on Friday, as the country’s leaders seek to lessen the pain of a stringent zero-COVID policy that has exacted a heavy economic toll and stoked rising public resentment.
The newly appointed Politburo Standing Committee of the nation’s top leaders, in one of its first major decisions, set out new rules to “optimize and adjust” the policy to minimize its impact on economic growth and people’s lives, as well as further open the country’s borders to foreign visitors, according to a release Friday by the National Health Commission.”
On top of there are reports that Russia is saying that their military objectives can be reached by peace talks, whatever the heck that means. With all these forces at play causing volatility in the petroleum markets, you have OPEC sending signals that they’re going to be cautious in making the decision on production levels when they meet next month on December 5th. This is going to be a big issue especially based on the fact that OPEC cannot even produce their target levels now, and we may see increased concerns when EU sanctions go into effect on Russian oil next month.
Bloomberg News reported that Saudi Arabia’s energy minister said the group would remain cautious about oil production. Bloomberg interviewed Prince Abdulaziz bin Salman who said:
“We are being cautious about being responsible and not losing sight of what the market requires. It’s about recession. I see what I also see what the other central banks are saying and doing.”
Saudi Aramco (TADAWUL:2222) CEO Amin Nasser told Bloomberg TV that “an unrealistic energy transition plan is causing the current supply and demand crisis in energy.”
OPEC plus has been correct about withholding supply because the United States has not done so. By releasing so much oil from our Strategic Petroleum Reserve, it leaves less flexibility to meet potential supply issues in the future. While the Biden administration is taking victory laps for the recent dip in inflation, the truth is that we face a lot of upside risk as we go into winter.
Treasury Secretary Yellen is still cautious against overreacting to the October inflation data, but it really doesn’t matter because if China reopens its economy, the supply deficit will drive prices higher.
High volatility in the ultra-low sulfur diesel, which covers heating oil, jet fuel, diesel, and other heavy oils, has been crazy as hedgers are worried whether or not there will be enough supply to get them through winter.
Natural Gas looks like we hit bottom. Make sure you are hedged.
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