The Energy Report: A Moment of Clarity

Petroleum prices seemed to have had a moment of clarity yesterday as they took some time to focus on supply and demand and wildfires in Canada and took their mind off debt ceiling talks and Fed officials who like to hear themselves talk. Not only did they take a moment to focus on gasoline inventories that are at historically low levels for this time of year, but they also started to ponder what may happen to crude prices if the economy does not take a sharp downturn.

Petroleum prices have seemingly been divorced from supply and demand fundamentals. That has occurred in part because of governments intervening in the market with supposed caps on prices and an unprecedented global strategic petroleum reserve release. Yet now the piper must be paid as artificially low prices have dried up much-needed investment in fossil fuels. Both the US and India have announced plans to repurchase oil for their reserves, and that will only add to the supply deficit that we have seen coming and seems to be confirmed by the likes of the International Energy Agency.

Despite all the negativity surrounding oil demand, JODI reported that global oil demand increased by 3 MB/D MoM in March to the highest level ever registered by Jodi-reporting 114 countries.

Now you know that the US started to buy back oil for its reserve, yet India is announcing that it will also buy oil for its reserve. Bloomberg News reports that India approved about 606 million dollars to refill its strategic storage. “India allocated 50 billion rupees ($606 million) in its budget earlier this year toward filling strategic stockpiles.

In February, the International Energy Agency said that the funds could cover purchases of about 10 million barrels of Russian crude, or around 7 million barrels of non-sanctioned oil.” I am assuming they will buy most of it from Russia. While India has also feasted on cheap Russian oil, they have bought good old US Strategic Petroleum Reserve oil. That won’t be possible now as the US turns from a seller to a buyer.

That will be welcome news for Russian President Vladimir Putin, that has found India and China, for that matter, to be a big buyers of the crude that Europe did not want. Then they refined some of it into a product and sold it back to Europe. On top of that, Russia should get more money for that oil in the next few months as Mr. Putin vowed to cut back production, adding to the supply squeeze allowing Russia to command a higher oil price. To avoid that, those talkative Fed officials had better hurry up and start that deep recession.

Just when you thought gasoline prices at the pump had peaked, the RBOB gasoline futures soared on a supply report, and if you are a driver, you should be concerned.  The Energy Information Administration (IEA) reported that total motor gasoline inventories decreased by 1.4 million barrels from last week and are about 6% below the five-year average for this time of year and at the lowest level since 2014. While the wildly fluctuated report on weekly demand was down, the four moving averages showed that gasoline demand averaged 9.1 million barrels a day, up by 2.9% from the same period last year.

The good news is that we have seen increased refining capacity, and refiners increased their runs to 92% of capacity and 9.5 million barrels of gasoline to stay ahead of demand. Yet because we have so little gas in storage, we can’t afford to have any refining mishaps because that could cause the market to spike.

We have seen, for example, gas prices spike in some parts of the country to refining mishaps and the Alberta wildfires that have shut down energy production. Reuters reported that “hot and dry conditions have triggered an intense and early start to wildfire season in Alberta. As of Wednesday, 91 wildfires were burning in the forest protection area of Alberta, including 27 out of control. Concerns about the wildfires have also led benchmark Canadian heavy crude prices to rise to their highest levels in months. On Wednesday, consultancy firm Rystad Energy said nearly 2.7 million barrels per day (bpd) of Alberta oil sands production in May is at risk in “very high” or “extreme” wildfire danger rating zones. Of estimated May production volumes, about 60% are currently subject to extreme wildfire danger levels, with the remaining 40% subject to very great danger, Oslo-based Rystad said.

Crude oil supplies in the US are insufficient to make up the difference even after the EIA reported a surprise weekly build of 5.0 million barrels from the previous week, at 467.6 million. {{8849| US crcrude oil inventories are slightly below the five-year average for this time of year.

Yet the supply increase last week was helped by a 2.4-million-barrel release from the SPR. The SPR is still 178.4 million barrels below year-ago levels and must be refilled at some point. That long journey begins with a first step or a 3-million-barrel purchase in June. They have a long way to go.

The Alberta wildfires also focus on diesel as that heavy Canadian crude is perfect for that diesel production. The EIA reports that “Distillate fuel inventories increased by 0.1 million barrels last week and are about 16% below the five-year average for this time of year. Not very comforting. Farmers have been burning diesel and continue to be ahead of schedule in planting their crops.

It is possible that the market was underestimating demand because of too much focus on the industrial sector. The Wall Street Journal reported:

Weak oil demand from factories is partly to blame for struggling oil prices, with US manufacturing shrinking for the past six months straight, according to ISM data, and places such as China not faring much better. But Goldman Sachs (NYSE: GS) says coming “to the rescue” is a solid services sector. “Weakness in global manufacturing is raising concerns about oil demand,” Goldman says in a note, adding, “We don’t think that today’s weak goods sector data will prevent global oil demand from growing. For one thing, the services sector is still thriving as the recovery has some additional room to run … Our key finding is that services GDP drives about 70% of global oil demand.”

Sharon (Ji Hyun) Cho tweeted that there is a pickup in the physical oil market,

“In a sign of relief, refiners in Asia are stepping into the market to pick up US crude. Buyers in Taiwan, S. Korea bought at least 14m bbls of US oil for mostly Aug. delivery this month. The recent plunge in freight helped, although that’s reversed. S. Korean and Japanese refiners have also purchased Middle Eastern barrels that include Abu Dhabi’s Murban, Upper Zakum, and Umm Lulu. While that’s a welcome sign for physical and paper markets, traders say supply is still abundant, and margins are still lower.

Natural gas is still trying for a bottom; betting summer may bail out the beleaguered market. We are seeing producers sharply cut back on rigs and getting increased demand expectations from the EIA. Domestic natural gas consumption for power generation this summer will be among the highest on record, second only to last summer, according to projections from the Energy Information Administration (EIA).