Woo-hoo! Gasoline prices are below $4.00 a gallon! Inflation came in lower than expected! I hope you enjoy this wonderful economic news, but I’m afraid to tell you it may not last. Already the petroleum side and the natural gas price slide are coming to an end. The Biden administration, rightly so, is taking credit for surprisingly cool consumer price index data but, at the same time, will have to own the coming winter price spike in oil and gas.
The administration is also celebrating the fact that retail gasoline prices have fallen below $4 a gallon. They credit their wise moves to release oil from the Strategic Petroleum Reserve (SPR) for that drop in the pump price. AAA reported that gasoline prices fell to $3.99 a gallon, and even though that price drop is welcome, it is still substantially above the $3.181/2 cents a gallon from a year ago. Yet the reality is demand destruction, and economic pain are causing the drop. Now that the U.S. SPR is at dangerously low levels, the odds of price spikes are greater.
The EIA reported that U.S. commercial crude oil inventories increased by 5.5 million barrels from the previous week. At 432.0 million barrels, U.S. crude oil inventories are still 5% below the five-year average for this time of year. That is not good because the Biden administration has lowered the number of reserves and storage in the SPR to the lowest level since 1985 and perhaps the lowest ratio between sweet crude and sour crude ever.
That should raise alarm bells for winter fuels. The EIA reported that distillate fuel inventories increased by 2.2 million barrels last week and are about 24% below the five-year average for this time of year. Propane/propylene inventories increased by 2.1 million barrels last week and are about 10% below the five-year average for this time of year. This is not comforting data considering that winter is coming.
The EIA also reported that the total motor gasoline inventories decreased by 5.0 million barrels last week and are about 6% below the five-year average. Gasoline exports surged to 1.13 million barrels a day, the highest level since December of 2018.
Yet it might be consumer pain that has more to do with the drop in gasoline prices because if you look at the facts, drivers seem to be driving less than they were during the pandemic. Oh, sure, it is true that the stunning drop in gasoline demand that we saw week over the week was overstated, and we saw that in yesterday’s Energy Information Administration (EIA) report. There was a big bounce back in demand. The big picture tells us that, on the whole, the gasoline data says U.S. consumers are fed up with inflation and feeling economic pain.
Globally, supplies are not that much better, and the International Energy Agency (IEA) reports that in Europe, “Soaring oil use for power generation and gas-to-oil switching are boosting demand.” And because of that, the IEA raised their estimates for 2022 global demand growth by 380 kb/d, to 2.1 mb/d. Still, the International Energy Agency did say that the world oil supply hit a post-pandemic high of 100.5 million barrels a day in July. Yet, at the same time, they warned that global oil inventories fell by 5 million barrels.
What we all know is that there is demand destruction in gasoline because of the sharply higher prices. We also know that the reported 7% drop was way overstated, and as we expected, it came back in a big way last week. The EIA showed an increase of 580,000 barrels of demand a day, putting total demand back to 9.123 million barrels a day. The EIA clarified the erratic swings in weekly demand and said:
“We recommend focusing on the four-week moving average given the week-to-week variability arising from our WPSR estimates. The moving average tends to represent recent market activity better than focusing on a single week’s estimate. Four-week moving averages are particularly useful for data series such as imports and exports, which can significantly vary week to week and are subject to timing issues because of how they are reported. As PSM data are released, monthly statistics should serve as a benchmark against which subsequent weekly series are compared.”
Natural gas prices today are on fire, and it looks like we’re breaking out to the upside. Hot temperatures, strong global demand, and the expectations that we are getting closer to the re-opening of the Freeport LNG export facility is all conspiring to drive prices.
Dan Molinski at the Wall Street Journal writes that U.S. government natural-gas data due Thursday is expected to show inventories rose last week by a smaller-than-normal amount as hot weather in Texas and the South spread more broadly into the Mid-Atlantic and Northeast regions, boosting demand for cooling.
The Energy Information Administration is expected to report that gas-in-storage levels increased by 39 billion cubic feet during the week ended Aug. 5, according to the average forecast of 13 analysts, brokers, and traders surveyed by The Wall Street Journal. The EIA is scheduled to release its natural-gas storage data for the week at 10:30 a.m. ET Thursday. Estimates range from increases of 30 bcf to 44 bcf. The average forecast compares with a 44-bcf increase in storage last year and a 45-bcf five-year-average rise. A 39-bcf increase last week would mean gas stocks totaled 2.496 trillion cubic feet, 10% below last year’s total and 12% below the five-year average.
The market has maintained a bullish inventory deficit compared to averages throughout 2022. While the June 8 shutdown of the Freeport LNG plant in Texas has hurt feedgas demand, a hotter-than-normal summer has offset nearly all that reduction in consumption by the LNG export industry.