Oil prices surge as U.S. refiners are making heroic efforts to alleviate a winter fuel shortage. They are running at record-breaking rates to keep Americans warm. The U.S. refining industry is doing more with less even as they are under continued fire from the Biden administration, which has accused them of price gouging and war profiteering. Yet, looking at the data from the Energy Information Administration (EIA) yesterday, if we do not have a shortage of winter fuels, then we really have the U.S. energy industry to thank.
Before we get to that, one question I have asked many times over the last few months is, “If demand is so bad, then why are supplies so tight?”
Well, we got a partial answer to that question from the Energy Information Administration (EIA) yesterday. The answer was that demand was never that bad in the first place.
The EIA made a dramatic upward revision in its monthly data and showed that U.S. oil demand hit 20.470 million barrels a day in September. That was an increase of 331,000 barrels per day, up 1.6% from last year. That means oil demand in the month of September clocked in at the highest September since 2006 and way above the EIA’s previously reported demand figures at 19.961 million. That explains it. So, if you’re wondering why oil supplies and commercial inventories and SPR inventories have been evaporating with low demand, the problem is demand was never low.
I’m not picking on the Energy Information Administration because it has a very tough job but at the end of the day. It’s very frustrating when the market is reacting to data that shows that demand is falling when it is rising. The massive underreporting of demand and its disconnect with supply has caused a lot of unnecessary volatility in the energy markets in recent weeks. In all fairness to the EIA, it warns that its data can change at the end of the month and to not read too much into its weekly demand numbers. Yet, not only have we seen major underreporting of demand in EIA reports, but record crude oil supply adjustments. The EIA seems to overreport oil production and underestimate oil demand. The EIA may need more funding to help fix its models.
Bad demand data and its subsequent price impact can change investment decisions and drilling decisions and could impact the availability of supply in the future. Based on the crude oil draw that we saw in the EIA weekly Status Report, it appears that demand is rip-roaring. The EIA reported a 12.27-million-barrel crude draw. That was the biggest one-week crude supply drop since June 2019. That came even with a 1.4-million-barrel release from the U.S. Strategic Petroleum Reserve, which, by the way, has been drained down to its lowest supply level since March of 1984. It also came as the EIA said U.S. crude production grew by 2.4% to 12.27 million barrels a day in September, which, if correct, would be the highest production reading since March 2020.
Sure, the EIA showed that weekly demand numbers were off for gasoline and distillates, but looking at the actual supply and other signals, we know that demand will have to be revised higher again at the end of this month.
Now back to those amazing U.S. refineries. They are in a race against time to shore up supply and are operating at a historically high – if not record-breaking high – use of their depleted production capacity. They are squeezing more blood out of a turnip than ever before. The EIA reported refineries operated at 95.2% of their operable capacity last week and that means many are running at and even above their stated capacity. The EIA reported that U.S. crude oil refinery inputs averaged 16.6 million barrels per day during the week, ending up 228,000 barrels from last week.
U.S. refiners produced an impressive 9.4 million barrels of gasoline and an equally impressive 5.3 million barrels of distillate a day.
That helped ease energy product shortfall as both gasoline and distillate inventories saw much-needed gains. The EIA reported that distillate fuel inventories increased by 3.5 million barrels last yet are still 11% below the five-year average for this time of year. Yet, it is much better than we were just a few weeks ago thanks to the refiners.
Total motor gasoline inventories also increased by 2.8 million barrels from last week but are still 4% below average.
Yet, the question remains, how long can refiners max out production? The U.S. refining industry not only is feast or famine on the economic side. It is also a very dangerous industry. Refiners right now are putting off maintenance in many cases to meet demand. Let’s pray that there are no refinery mishaps. Because if we’re going to rise to the occasion to meet demand this winter, we can’t afford any setbacks.
It wasn’t just the inventory data that helped oil. Believe it or not, oil got a boost from Federal Reserve Chairman Jerome Powell. What put the market in risk-on mode was the comment by Powell that we could see a moderating pace of interest rate increases this month. Those comments allowed the U.S. dollar to weaken and helped oil retain impressive price gains.
The oil market is also moving on OPEC speculation. Most people expect OPEC to roll over its previous production cut. There are still some that believe that OPEC may want to give us a surprise cut over the weekend. Make no mistake about it, if OPEC says it is going to cut production, then you have better believe it. Why do I say that? Because OPEC has already been compliant with its previous production-cut promises.
In the latest data from Reuters, it has been reported that OPEC oil production fell 710,000 barrels a day, falling to 29.10 million barrels a day. Reuters said that quota-bound members missed their November output target and underproduced by 800,000 barrels a day compared with 1.36 million barrels a day in October. Remember last month’s 2-million-barrel a day production cut included legitimizing current underproduction by smaller OPEC members. So, what I am saying is that even if OPEC surprises us with a small production cut at its meeting over the weekend, it could have a major price impact on the upside.
Now to add a little comic relief, it is being reported now the EU is considering capping the price of Russian oil at $60 a barrel. This is the same price cap that it was supposed to agree on last week and the week before and the week before that. Poland wants a much lower price cap because it has a lot to lose with the war on its border. Other consuming nations want a much higher price cap so they can still get Russian oil. The goal is to find a magic number that will allow Russian oil to be sold without Russia benefiting from higher prices. Spoiler alert! No such price exists. Russia continues to say that if any country caps the price of its oil, it will not sell it to them. So why bother?
Natural gas prices gave up gains yesterday. The weather forecast turned a bit milder and the odds of a railroad strike went down. U.S. natural gas production has been increasing according to the EIA. Argus Media reported that U.S. natural gas production hit a record high in September as higher energy prices supported drilling. Gross gas output from the Lower-48 U.S. states, which includes volumes lost in processing and production, reached 111.2 Bcf/d (3.2bn m³/d) in September, up by 0.7pc from August and 6.1pc higher than a year earlier. The U.S. Energy Information Administration (EIA) said today in its monthly report on gas production. Output has increased for seven consecutive months ended September, increasing by 6.2pc during that period.U.S. gas production has increased in the past year as producers ramped up production to meet higher demand in the U.S. power sector and for exports to international markets.
We are looking for a drawdown in inventory in today’s report somewhere in the area of 93 BCF.