Oil and products are on fundamentally solid ground, but technically, they do look scary. All the fundamental news seems to be bullish, and the charts are all still decidedly in uptrends, yet corrections in the market are making some nervous. We must be on guard for that possibility while acknowledging at the same time the backdrop of the wildly bullish fundamental outlook, especially in the near term.
The American Petroleum Institute (API) released very bullish data reporting that crude supply was down 2.05 million barrels with an even larger 2.502-million-barrel drop in the Cushing, Oklahoma delivery point. That was bulled up even more as the API reported a 1.138 million barrel drop in gasoline supply and a 2.203 drop in distillate, which should be extremely bullish if confirmed by the Energy Information Administration. Yet other factors and fear of heights are influencing market action.
Crude oil prices and products tried to shake off the selling that was inspired in part by rumors of an imminent Iran nuclear deal that could lift oil export sanctions and the fact that the imminent threat of war between Russia and Ukraine might not be so imminent.
Prices did rally back but slipped after Biden administration officials suggested that all options were on the table, even another potential release from the U.S. Strategic Petroleum Reserve. The Biden administration still does not understand that throwing oil on a market that is being driven by demand exceeding supply is like throwing gasoline on a fire. The supplies will burn up, and demand will fail to be quenched by higher prices making the longer-term situation worse, not better.
Yet the Biden administration says that they are going to work with other countries to try to release more oil into the marketplace, which of course failed miserably the last time they tried it.
White House press secretary Jen Psaki said:
“The president is doing everything we can do to address the squeeze that we know gas prices can have on families.”
Even the Prime Minister of Italy, Mario Draghi suggested that he was going to do whatever it takes to lower energy prices. Draghi said that:
“We are contemplating large-scale measures to combat rising energy prices.”
Yet unless they figure out a way to start drilling for more oil and not just releasing oil from the reserves, they’re going to have little success.
All signs seem to suggest that demand for oil and gas is heating up around the world. JODI reported that Chinese gasoline demand hit an all-time high as it increased by 284 KBD m-o-m in November to 3.61 MBD – the highest level ever reported to JODI. Gasoline demand in November stood 638 KBD above year-ago levels and 882 KBD above November 2019.
In India, Bloomberg says that at least 18 of India’s 23 refineries operated at more than 100% of nameplate capacity last month, up from just eight in August, according to several refinery officials with knowledge of the matter.
Average run rates across the plants were 101% in December, compared with 87% in August, they said. Most refineries that operated above their nameplate capacities in November and December had been restricting activities for the previous few months.
In their Short Term Energy Outlook, the EIA said that their demand estimates that 99.0 million b/d of petroleum and liquid fuels were consumed globally in January 2022, an increase of 6.6 million b/d from January 2021. They forecast that global consumption of petroleum and liquid fuels will average 100.6 million b/d for all of 2022, which is up 3.5 million b/d from 2021 and more than the 2019 average of 100.3 million b/d. We forecast that global consumption of petroleum and liquid fuels will increase by 1.9 million b/d in 2023.
The EIA put U.S. regular gasoline retail prices averaged $3.31 per gallon (gal) in January, unchanged from December 2021 and up 98 cents/gal from January 2021. Retail diesel prices averaged $3.72/gal in January, up 8 cents/gal from December and up to $1.04/gal from last January.
Compared with year-ago levels, product prices have risen because of rising crude oil prices and high refining margins. EIA expects diesel prices will average $3.49/gal from 2Q22 through 4Q22.
The forecast decline in prices reflects our expectation of falling crude oil prices, particularly in the second half of 2022 (2H22), as well as lower refining margins as refineries increase throughputs in the coming months. U.S. crude oil production reached almost 11.8 million b/d in November 2021 (the most recent monthly historical data point), the most in any month since April 2020. EIA forecasts that production will rise to an average of 12.0 million b/d in 2022 and 12.6 million b/d in 2023, which would be record-high production on an annual average basis. The previous annual average record of 12.3 million b/d was set in 2019.