The Energy Report: Fed Sleight of Hand

Do not pay attention to the man behind the curtain. Can the Fed break global oil prices? The Fed can’t produce oil but can try to slow the economy to reduce the growing supply versus demand deficit.  The Fed cannot stop the historic supply drain from Cushing, Oklahoma but can continue to try to offset government spending-led inflation and have many energy experts asking what might have been had the government not declared war on the US oil and gas industry.

The Fed realized that the cost of energy is a problem and while the market is focused on the possibility of a more aggressive Fed, the oil inventory situation is speaking for itself. The heating oil crack spread is rallying on reports that Russia is going to temporarily limit fuel and diesel this morning. With diesel supplies tight and with Saudi Arabia and Russia using their energy dominance to respond to consuming nations using their reserves to try to control prices, it is now starting to take its toll as global oil inventories tighten. 

The Wall Street Journal wrote that,

“Federal Reserve officials voted to hold interest rates steady at a 22-year high but signaled they were prepared to raise rates one more time this year to combat inflation. With economic activity stronger than anticipated, a majority of officials also expected they would need to maintain interest rates near their current level through next year, according to projections released Wednesday at the conclusion of their two-day policy meeting. Fed officials raised their benchmark federal funds rate at their previous meeting in July to a range between 5.25% and 5.50%. They began lifting rates from near zero in March 2022.” 

That today sent the dollar soaring, bonds falling and caused the totally rational exuberance in oil to come back down to earth but did not fix the supply shortage.

For WTI the draining Cushing delivery point is a factor that should keep the market supported. For gasoline, the crack has fallen due to post-Labor Day demand drops and high pump prices that have slowed demand. Still, we do not look for the market to fall much further because the supplies are just too tight, and the global competition for supply remains solid.

The Energy Information Administration (EIA) showed tight supply and stellar demand overall. The EIA showed that U.S. crude oil inventories are about 3% below the five-year average for this time of year. Total motor gasoline inventories decreased by 0.8 million barrels from last week and are about 3% below the five-year average for this time of year. 

Distillate fuel inventories decreased by 2.9 million barrels last week and are about 14% below the five-year average for this time of year. Total product demand over the last four-week period averaged 20.9 million barrels a day, up by 6.8% from the same period last year.

Over the past four weeks, motor gasoline product supplied averaged 8.8 million barrels a day, up by 2.8% from the same period last year. Distillate fuel product supplied averaged 3.8 million barrels a day over the past four weeks, up by 11.5% from the same period last year. Jet fuel product supplied was up 14.2% compared with the same four-week period last year.

The Saudis seem to own this market right now. Fox News reported that

“Saudi Arabia’s Crown Prince Mohammed bin Salman in his first interview with a major American news network since 2019 addressed controversies that have plagued his country and government over the past few years. “Saudi Arabia is so big, so I’m quite sure most any person on the world, directly or indirectly, you have something to do with Saudi Arabia,” bin Salman said in an interview with Bret Baier, Fox News chief political anchor and anchor and executive editor of “Special Report with Bret Baier.” 

Baier spent a week in Saudi Arabia interviewing various members of the government and local business owners before his historic sit-down talk with the crown prince on the artificial island of Sindalah, built in the Red Sea (NYSE:SE). Once face-to-face with the leader of the fast-growing G-20 economy, Baier ensured that he addressed the controversial laws and incidents involving Saudi Arabia. Chief among those ranks, the murder of Washington Post journalist Jamal Khashoggi in 2018, which the CIA concluded bin Salman had personally ordered. Khashoggi had written several articles critical of the crown prince, and U.S. intelligence alleges that the operation to kill Khashoggi – involving 15 people who ambushed and murdered him – could not have happened without bin Salman’s direct consent. Bin Salman told Baier that

“Anyone involved” in Khashoggi’s killing is serving time in prison and must “face the law.” “We took all the legal measurements that any country takes. We did that in Saudi Arabia and the case was closed,” he said. “Also, we try to reform the security system to be sure that this kind of mistake doesn’t happen again, and we can see in the past five years nothing of those things happened. It’s not part of what Saudi Arabia does.”

Baier also addressed Saudi Arabia’s ties to the attack on September 11, in which 15 of the 19 hijackers who executed the plan were Saudi citizens. Bin Salman rejected the accusation that his government facilitated or supported the attacks, highlighting the various attacks Usama bin Laden planned and executed against Saudi Arabia in the 1990s, admitting that he was able to recruit Saudis to help his cause but that it “doesn’t make any sense” for the country itself to help a man actively hurting it. “After that, killing Saudis and foreign people at that time in Saudi Arabia, he’s our enemy and he’s the American enemy,” bin Salman stressed.

One of the most pressing concerns for U.S. foreign policy is the Iran nuclear program, which the Biden administration has sought to limit through the resurrection of the Obama-era Joint Comprehensive Plan of Action (JCPOA). Last month, the Biden administration agreed to provide Iran access to roughly $6 billion in frozen assets for humanitarian purposes in exchange for five detained Americans. Bin Salman argued that the deal presents a positive “step” in negotiations and that he hopes Iran uses the money for good purposes to encourage the world to “do more.” But when asked about the potential for Iran to obtain a nuclear weapon and what it means for Saudi Arabia, the crown prince again did not mince words and clearly stated that:

"Should Iran ever obtain such a weapon, Saudi Arabia would “have to get one, for security reasons, for balancing power.”

“We are concerned if any country getting a nuclear weapon: That’s a bad, that’s a bad move,” he said. “They don’t need to get nuclear weapons because you cannot use it.” 

“Any country use a nuclear weapon that means they are having a war with the rest of the world,” he added. “The world cannot see another Hiroshima. If the world sees 100,000 people dead that means you are in a war with the rest of the world.”

“So to use this effort to reach a nuclear weapon because you cannot use it if you use it, you got to have a big fight with the rest of the world.”

When asked about efforts to “normalize” relations with Israel, bin Salman also rejected the reports that Saudi Arabia had paused negotiations, which he stressed was “not true.”  “Every day we get closer, it seems it’s for the first time real one serious. We get to see how it goes,” he said. He insisted his country could work with Israel, no matter who is in charge, calling the deal “the biggest historical deal since the end of the Cold War,” which he stated would rest upon agreements related to the treatment of the Palestinians. Bret Baier’s interview with Saudi Arabia’s Crown Prince Mohammed bin Salman can be seen on Fox News “Special Report. On the FOX News Web.

Natural Gas should see an injection of 70 bcf. The strong heating oil market is going to help support natural gas as the shortage will have countries looking for alternatives. LNG exports from the US should hit record highs.