Oil prices gave up their gains yesterday after the Energy Information Administration seemed to suggest that the U.S. might be heading into a recession.
In the EIA Short-Term Energy Outlook it said: “Uncertainty in macroeconomic conditions could significantly affect energy markets in the forecast period. Based on the S&P Global macroeconomic model, we now expect U.S. GDP will fall slightly in 2023, which we forecast will contribute to a drop in total U.S. energy consumption next year.”
Normally, you don’t look to the Energy Information Administration to call for a recession and maybe it didn’t on the surface, but once the report came out, it did seem to suggest that the agency was worried about a significant drop in demand. Oil prices fell after the report was released.
After that it didn’t help the market that we had a surprise build in crude oil inventory as reported by the American Petroleum Institute. The API reported that crude oil inventories increased by 5.618 million barrels, much more than expected. The market was looking for just a +1.1-million-barrel build, including the 3.6-million-barrel SPR release. The API also reported a 2.553-million-barrel increase in weekly gasoline supply and while that may be a bit bearish, the situation on distillate fuel is not getting any better.
The API reported distillate inventories fell by 1.773 million barrels. That is not a good sign as diesel prices are already near three-month highs at $535.7, according to AAA. The EIA said, “U.S. distillate fuel inventories average 17% below the five-year average in our forecast for 2023. We estimate distillate inventories were 104 million barrels at the end of October, the lowest end-of-October level since 1951."
Retail heating oil and diesel prices will continue to average more than $5 per gallon for the rest of 4Q 2022. We expect a slightly contracting U.S. economy will reduce distillate prices in the first half of 2023 (1H23). However, the EU’s ban on seaborne imports of petroleum products from Russia creates supply uncertainty for distillate markets in early 2023.
Higher heating oil prices and consumption, due to colder forecasted temperatures this winter, resulting in our expectation that the average U.S. home that uses heating oil as its primary space heating fuel, will see expenditures increase by 45% compared with last winter. In last month’s Winter Fuels Outlook, forecasted expenditures will rise 27% over last winter, according to the EIA.
International Energy Agency IEA executive director Fatih Birol is lashing out at OPEC for its decision to cut production.
Bloomberg News reported: “The head of the International Energy Agency slammed last month’s decision by OPEC+ to reduce oil output, saying it’ll worsen the outlook for countries sliding toward a recession. 'The recent decision of OPEC+ to cut the production by 2 million barrels a day was not helpful,' Birol said Wednesday in an interview from the COP27 summit in Egypt. The move is fuelling inflation, especially in developing countries, and may require a 'rethink,' he said."
Well then, the IEA executive director should rethink his agency’s call for a drop in fossil fuel investments. It’s amazing to me that the International Energy Agency can criticize OPEC for reducing production when this agency has called for a total ban on fossil fuel investments. The COP 27 should be renamed the hypocrisy summit.
Speaking of hypocrisy, climate czar John Kerry flies around in his private jet, but wants U.S. taxpayers pay more money to reduce fossil fuel consumption. India and China, some of the biggest polluters on the planet, did not attend COP 27. COP 27 isn’t about saving the climate, it’s about the new global socialist order.
Natural gas giveth and then takes it away in a wild swinging market that seems to move either way with the least bit of provocation. Cold weather forecasts seem to overshadow weeks of impressive injections into supply. There are also mixed stories about when the Freeport Helen G export terminal will resume. One of the main reasons we have seen the impressive injections in November has been mild weather along with the fact that Freeport continues to be shut down and other LNG terminals were in maintenance.
The EIA says, “We estimate U.S. natural gas inventories ended October 2022 at more than 3.5 trillion cubic feet (Tcf), which is 4% below the five-year average and higher than what we had been forecasting in recent months. The fall in our forecast by 2.1 Tcf this winter to 1.4 Tcf by the end of March 2023. This withdrawal would be similar to the five-year average and results in inventories that are 8% below the five-year average at the end of March 2023.
Because of higher-than-expected storage levels heading into winter, our forecast natural gas spot price at Henry Hub averages about $6 per million British thermal units (MMBtu) across 4Q22 and 1Q23, which is more than $1/MMBtu lower than we forecast in the October STEO. EIA expects natural gas prices will decline after January as the deficit to the five-year average in inventories decreases.
On the trading side, crack spreads will remain very attractive. Traders that want to take advantage of heating oil but are concerned about the volatility may find a little bit of protection in some bull spreads.