The Energy Report: De-Risk

Another day another bank failure. The banking crisis is causing a deleveraging by big banks, pulling back their exposure to oil and causing prices to fall harder than other risk assets. Credit Suisse is causing today’s turmoil after the Saudi National bank Chairman Ammar Al Khudairy ruled out more assistance from their bank. He does not think they will need any more money. The stockholders see it differently, selling shares causing a halt in the stock and shares down over 20%. The Fed swaps are now pricing in a 100% chance of an interest rate cut in December.

The oil moves smack of market liquidation as opposed to anything directly related to current supply-demand fundamentals. This is evidenced by a substantial drawdown in oil product inventories as reported by the American Petroleum Institute (API), which reported that gasoline supply fell by 4.587 million and distillates by 2.886 million. Even the reported 1.155-million-barrel increase in crude oil supply was tempered by a reported 946,000-barrel drop in Cushing, Oklahoma supply. Yet supply and demand for oil do not matter when we have a run on the bank.

Even the International Energy Agency (IEA) is warning that the oil supply they say is currently in an oversupply situation will turn into a supply deficit later in the year. The IEA says that oil is currently oversupplied due to Russia looking for a home for its oil. Yet It is also being reported that Russia’s oil exports dropped by 500.000 barrels a day in February to 7.5 million barrels a day, and they could make good on their threat to cut production by a similar amount.

The IEA did say the global stockpiles did increase by 7.8 billion barrels, the largest level since 2021, but still believes that the market could flip to an undersupply situation. At the very least, the market should be balanced by the middle of the year.

This comes as reports from the Chinese and Saudi finance ministers that say early signs of the China reopening are promising. They also said that Saudi investments in Iran could happen very quickly following an agreement. Who said Biden couldn’t bring the world closer together? He’s doing a great job pushing Russia and China closer together, and now Saudi Arabia and Iran. Arab News reports that Saudi Energy Minister Prince Abdulaziz bin Salman said on Tuesday that the Kingdom would not sell oil to any country that attempts to impose a price cap on its supplies.

Reuters is also reporting that China is on track to import 5.39 million tonnes of LNG in March, according to data compiled by commodity analysts Kpler. This would be up from February’s 4.96 million tonnes and above the 4.77 million from March last year.

Prince Abdulaziz said in an interview published by Energy Intelligence that placing a ceiling on oil prices would inevitably lead to market instability, and Saudi Arabia would reduce its oil production. The Prince added that the OPEC+ group of oil-producing nations had succeeded in bringing significant stability and transparency to the oil market, especially in comparison to all other commodities markets.

“The NOPEC bill does not recognize the importance of holding spare capacity and the consequences of not holding spare capacity on market stability,” he said.

EBW on natural gas is saying that the April contract found support early this week after last week’s 19% plunge from overbought levels north of $3.00/MMBtu. A modest bullish weather shift and three consecutive colder weeks ahead for the first time this winter could enable NYMEX futures to trend moderately higher in the coming weeks.

Fundamentally, the storage surplus vs. the five-year average may narrow more than 100 Bcf after Thursday’s EIA report—a sharp departure from repeatedly building inventory surpluses for the past three months.

I believe that the banking crisis sell-off at this point is overdone on oil, and we should find some stability shortly as soon as there’s a perception that the dominoes are going to stop falling. We should have a significant rebound in the short term and see some extreme turbulence, so make sure you keep your seat belt buckled.