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The Energy Report: Breaking Up Is Hard To Do - Just Ask The Oil Markets

Published 01/12/2022, 09:02 AM
Updated 07/09/2023, 06:31 AM

Breaking up is hard to do, but global oil markets are doing it anyway.

Oil is breaking up into stochastically overbought areas and making up for lost momentum that was taken away with Omicron scares. Growing oil shortage fears are creeping back in as OPEC fails to deliver and despite promises of more U.S. production, the math between supply meeting demand is just not adding up.

The API gasoline surge in supply that was reported last night is also not adding up and is being ignored by the marketplace. In fact the mood is getting so bullish that Pioneer Natural Resources (NYSE:PXD), a major oil producer, is lifting its hedges as they have more confidence in a very strong oil market.

The EIA also is acknowledging the risk of rising prices by upping its demand estimate and its outlook for crude oil prices by more than 7% from its previous December report. The EIA reported Brent crude oil spot prices averaged $71.00 per barrel in 2021 and we forecast Brent prices will average $75/b in 2022 and $68/b in 2023. It’s all going the bull’s way and even rising rate fears by the Fed are on the back burner.

The American Petroleum Institute report was largely ignored after they reported a whopping build of 10.86 million barrels of gasoline supplies last week that would coincide with reports from GasBuddy that show that gasoline demand dropped dramatically. But one must wonder at the same time whether or not this build is reflective of demand just falling off the map, or is it just an aberration.

The futures markets right now believe it’s some sort of aberration and gasoline prices are actually moving higher. In fact the number included more gas bleeding components than actually finished gas so the market is taking gas for a ride.

The EIA reported that U.S. regular gasoline retail prices averaged $3.02 per gallon (gal) in 2021, compared with an average of $2.18/gal in 2020. We forecast gasoline prices will average $3.06/gal in 2022 and $2.81/gal in 2023. U.S. diesel fuel prices averaged $3.29/gal in 2021, compared with $2.56/gal in 2020, and we forecast diesel prices will average $3.33/gal in 2022 and $3.27/gal in 2023.

The bigger concern might have been the crude supply draw. There were some people believing that the crude oil inventories were going to rise, but a drawdown of 1.077 million barrels plays into the fears that global inventories are falling at a much faster pace than anyone had realized.

The Energy Information Agency (EIA) reported that their estimate of global liquid fuels inventories fell by an average of 1.4 million barrels per day (b/d) in 2021 compared with inventory growth of 2.1 million b/d in 2020. Global oil inventories rise in the forecast, increasing at a rate of 0.5 million b/d in 2022 and 0.6 million b/d in 2023.

In fact, that is one of the reasons why the Energy Information Administration yesterday, in their short term energy outlook, had to raise their demand forecast and their price forecast for oil. The EIA predicted that global consumption of petroleum and liquid fuels averaged 96.9 million b/d in 2021, up by 5.0 million b/d from 2020, when consumption fell significantly because of the pandemic. We expect global liquid fuels consumption will grow by 3.6 million b/d in 2022 and 1.8 million b/d in 2023.

Natural gas is also breaking up. EBW Analytics reports that a broadening and deepening January cold push led the NYMEX front-month to climb to six-week highs and eclipse the 200-day moving average. North of $4.00/MMBtu, the price inelasticity of short-term demand creates the potential for significant further gains without loosening the supply/demand balance.

January 2022 is on pace to be the coldest month since the 2014 Polar Vortex, with higher demand per gHDD, deeper freeze-offs and LNG feedgas all creating the potential for the largest monthly withdrawal on record. Over the next five weeks, the 96 Bcf storage surplus vs. the five-year average is projected to flip to a 200 Bcf deficit—further increasing upward potential.

After the February contract rolls off the board and March assumes the front-month role, downward pressure remains likely to surface. Downside potential, however, has narrowed considerably as a result of near-term tightening.

The EIA also acknowledges the growing importance of natural gas powering America and this should also be the go-to fuel for an energy transition. The EIA reports that the share of U.S. electric power generation produced by natural gas averaged 37% in 2021, and we expect it will average 35% in 2022 and 34% in 2023.

Our forecast for the natural gas share as a generation fuel declines primarily as a result of increased generation from new renewable energy generating capacity. Coal’s average generation share rose to 23% in 2021 as a result of higher natural gas prices, but we expect it to decline slightly over the next two years, averaging near 22% in 2022 and 2023. We expect the nuclear share of generation will remain near 20% over the next two years.

We expect electricity-generating capacity from renewable energy sources to continue to grow in 2022 and 2023. Our forecast includes both wind and solar capacity growth, with solar capacity growing at a faster rate.

The extreme drought conditions in the West may moderate somewhat in the next year, and we forecast that the share of U.S. generation from hydropower will rise from 6% in 2021 to 7% in 2022 and 2023. The U.S. retail electricity price for the residential sector in our forecast averages 14.2 cents per kilowatthour in 2022, which is 4% higher than the average retail price in 2021. Forecast residential prices remain relatively the same in 2023.

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