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The Energy Report: Fed Reversal

By Phil FlynnCommoditiesDec 06, 2022 02:03PM ET
The Energy Report: Fed Reversal
By Phil Flynn   |  Dec 06, 2022 02:03PM ET
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Oil prices that were surging on the decision surrounding the Russian oil price cap and the fact that OPEC decided to continue with their production cut abruptly reversed course. Apparently, there were some folks at the Federal Reserve that haven’t been happy with the stock market’s recent fortunes and the economic optimism that has cooled off the red-hot dollar and the corresponding jump in energy prices. Enter the Fed Whisperer.

Nick Timaros at the Wall Street Journal heard a whisper from some unnamed Fed official that by the way is supposed to be in a quiet period, leaked to him that “elevated wage pressures could lead them – the Fed -to continue lifting interest rates to higher levels than investors currently expect.” Now, why did they expect what they expected? Well, comments by none other than Fed Chairman Jerome Powell himself. In other words, the Fed was concerned with the market optimism from Federal Chair Jerome Powell’s statements last week that the bank was prepared to downshift the size of rate increases in the coming meetings. That raised investor confidence.

Now the Fed has to crush that confidence like a bug. Since Chair Powel’s speech, we’ve seen a break in the dollar, raising Fed inflation fears. The same Fed that told you this inflation thing was transitory, and now to fix it, the Fed may need to sacrifice your job or your neighbors.

There were some that suggested that the reason why the oil markets sold off after such a strong rally was because Saudi Arabia, in the aftermath of the European price cap on Russian crude, lowered the selling price of their oil to Asia to a 10-month low and that might be a signal of weak demand. And while that may be partially true, the reality is that Saudi Arabia lowered their selling price of crude oil to compete with discounted Russian barrels. That would not explain why other commodities sold off as well.

Overnight headlines read that Russia’s Deputy PM Novak said that the “Russian mechanism of banning sales of oil subject to the Western price cap should start working before the end of the year. He said that oil production in Russia in December 2022 will remain at the November level. Russia might reduce oil production, but not by much. Russia is changing logistics chains for oil and does not see this as a tragedy. The introduction of the oil price cap will affect companies, but Russian oil will be in demand.

Oil prices also saw a bit of pressure from the Financial Times story that seemed to suggest that oil tankers are backing up in Turkey. The FT reported that around 19 crude oil tankers were waiting to cross Turkish waters on Monday, according to ship brokers, oil traders, and satellite tracking services. The vessels had dropped anchor near the Bosphorus and Dardanelles, the two straits linking Russia’s Black Sea ports to international markets. The first tanker arrived on November 29 and has been waiting for six days, according to a shipbroker who asked not to be named. The tankers waiting in and around Turkish waters are the first sign that the price cap could disrupt global oil flows beyond Russia’s exports.” Four oil industry executives said Turkey had demanded new proof of full insurance coverage for any vessels navigating its straits in light of the Russian oil price cap.

While this made oil back up, in the short term, it means that prices may be higher in the long term. If supplies move more slowly, it could make prices go higher. In the short term, it could back up supplies and push prices down in certain production areas. Oil analyst Anas Alhajji says this is just a powerplay by Turkey to increase its influence in Europe. He does not think it will last.

The bottom line is that the market is still moving in fear that the Federal Reserve is going to drive the economy into a recession. This will make the market pay attention to the fact that US supplies more than likely are going to plummet again in this week’s inventory number. Last week it was reported that the Strategic Petroleum Reserve released 2.1 million barrels, lowering supplies down to 387 million barrels in reserve. My expectation is that crude oil supplies could fall as much as 4,000,000 barrels in this week’s report. There are whisper numbers by some in the industry who thinks that the draw could be twice that much.

As I mentioned before, drawing down the SPR is becoming a more dangerous proposition. People I’ve talked to in the industry are concerned about the long-term damage to some of the salt caverns that hold the oil, and the releases from the SPR to try to cool prices are like giving a drug addict drugs. It may make them feel better for a while, but when you get off of the drugs, there’s going to be hell to pay.

Given the short term, it may not matter because it’s difficult to fight the Federal Reserve if they’re going to squash every sign of economic optimism. The Fed-induced recession is going to happen. The question is whether it’s going to happen fast enough to slow demand enough for us to meet winter demand. The weatherman and Mother Nature probably want the answer to that question. If China fully reopens its economy, we will have a huge deficit. The market wants to signal the all-clear situation on tight supplies, yet the reality is much different.

High production levels and weak demand did crush natural gases winter has yet to really dig in its heels. This week’s withdrawal number should be much smaller than the previous weeks coming in at about 22 BCF., so I think that the market is going to tighten up if we get cold, so look for some bullish options strategies.

The Energy Report: Fed Reversal

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The Energy Report: Fed Reversal

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Comments (1)
Don Getty
Don Getty Dec 06, 2022 7:12PM ET
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going to be very hard to stop inflation - to much of a shift into retirement by boomers and there 60 year old kids - we are going to have full employment and wage inflation for awhile - which will support demand of most commodities - the Fed to put the hurt on this will have to go full volker which powell will have to get up too!
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