The Energy Report: Give or Take

The Energy Information Administration (EIA) reported yesterday that US commercial crude oil inventories increased by 7.6 million barrels last week, give or take 15 million barrels or so. For the second week in a row, the EIA had a major crude oil adjustment to balance the books coming in at an astounding 2.073 million barrels a day or 14.511 million barrels. Last week the adjustment was an equaling puzzling 13.8 million barrels adjustment. These adjustments are way out of whack with historical norms, and the EIA has said that typically the adjustment is less than 2% of refinery crude oil inputs.

Last week's crude inputs were at 15 million barrels, so last week's adjustment is closer to a 14.5% percent adjustment. Regardless, the EIA tells us that based on that adjustment, U.S. commercial crude oil inventories are about 9% above the five-year average for this time of year. Just do not look at the SPR man behind the curtain. SPR Barrels are still 210.8 million barrels below a year ago.

The EIA also reported a surprise increase in distillate fuels which caused a big sell-off in ultra-low sulfur diesel futures before a late-day incredible comeback. Why the comeback? Perhaps because despite the fact that distillate fuel inventories increased by 2.7 million barrels last week, they are still 12% below the five-year average for this time of year. That is not a comfortable place to be, and as John Kemp of Reuters points out is a major problem.

Kemp writes that global inventories of diesel and other distillate fuel oils are exceptionally low – meaning prices will surge higher again quickly if the economy avoids a recession in 2023. Inventories have risen modestly from troughs in October and November 2022 as a result of increased exports from China and the worldwide slowdown in manufacturing and freight transport. But stocks in most regions are still close to multi-decade lows and would deplete quickly in the event the manufacturing and freight cycle turns up again soon.

He points out further that U.S. distillate inventories were -16 million barrels (-12% or -0.95 standard deviations) below the prior ten-year seasonal average on February 17. Europe's distillate stocks were -41 million barrels (-10% or -1.43 standard deviations) below the ten-year average at the end of January. Singapore's distillate inventories were -3 million barrels (-30% or -1.53 standard deviations) below the ten-year average on February 19. U.S. jet fuel inventories (closely related to distillates) were -4.0 million barrels (-10% or -1.77 standard deviations) below the average on February 17, at the lowest seasonal level since 1996. Middle distillates including jet fuel account for roughly a third of all global petroleum consumption (36 million barrels per day out of total global consumption of 98 million in 2019).

Kemp reminds us:

"Distillate fuel oil is the workhorse of the industrial economy, providing the main fuel used in trucking, railroads, manufacturing, construction, mining and oil and gas drilling."

Now if you think you are getting a free pass at the gas pump if you use gasoline, you better think again. The EIA reported yesterday that total motor gasoline inventories decreased by 1.9 million barrels from last week and are about 5% below the five-year average for this time of year. Not only that, the War in Ukraine is raising concerns about the availability of gasoline additives.

The Wall Street Journal reported that some analysts said gasoline's premium is poised to surge further because of a looming shortage of a petroleum product called vacuum gas oil, or VGO. VGO is essentially the sludge that remains after lighter and more valuable products are distilled by refiners out of crude oil. Complex refineries, like many in the U.S. and Europe, have the equipment to process VGO and turn it into gasoline. Simpler ones, like many in Russia, lack this capability. Until recently, Russia was the world's largest exporter of VGO, and most of it went to the U.S. and Europe.

Now Western sanctions on Russia's exports of refined products, which took effect earlier this month and which halted most European imports of VGO, could reduce the capacity of the U.S. and its allies to make gasoline. The sanctions' potential impact on diesel supplies and prices is widely recognized, but it pales in comparison with the possible consequences on those of gasoline, some analysts have said.

By the way, according to the EIA, gasoline demand was up last week.

The Fed might not like that because they seem to be unhappy that people have jobs. In the Fed minutes, they said, "Participants stated that the continued tight job market would contribute upward pressure to inflation. Darn you people that have the gall to work. You're running the Fed's plans!

Yet, while in the short-term oil is obsessed with looking at the small picture and short-term increases in crude supply, the outlook looks like we are just in the eye of an energy crisis hurricane. Oil movements do not show signs of a recession yet.

OilPrice.com points out that China is buying oil like crazy. They say that China is on a global crude oil buying spree, snapping up oil from the U.S., U.A.E, Saudi Arabia, and Russia. Ten supertankers are heading to the U.S. aiming to take advantage of a "remarkable, profitable arbitrage" opportunity sparked by Biden's SPR releases.

The IEA noted in January that:

"China will drive nearly half this global demand growth even as the shape and speed of its reopening remain uncertain."

OilPrice goes on to say, on Tuesday, we got another indication of precisely that: Unipec, the largest oil trader in China and the trading unit of state-held refiner Sinopec (OTC:SHIIY), and PetroChina, the largest oil and gas producer, and distributor in China, have both hired ten supertankers in March to haul US crude back to Asia, according to Bloomberg, citing people with direct knowledge of the matter. Each vessel can transport a whopping 2 million barrels of crude. The people said that the loading of the tankers is expected to occur across US Gulf Coast terminals.

"Chinese buying activity of US barrels seems to be the hottest activity right now," Viktor Katona, a lead crude analyst at Kpler, told Bloomberg. He said Chinese firms are taking advantage of a "remarkable, profitable arbitrage" for US crude that has been suppressed because of Biden's massive releases from the Strategic Petroleum Reserve.

In the meantime, climate craziness is making the world poorer and less secure. The Guardian reports that "Soaring energy prices triggered by the Russia-Ukraine conflict could push up to 141 million more people around the globe into extreme poverty, a study has found. The cost of energy for households globally could have increased by between 62.6% and 112.9% since Russia's invasion of Ukraine, according to a modeling study by an international group of scientists published in Nature Energy.

The study modeled the impact of higher energy prices on the spending of 201 groups, representing different expenditure levels, in 116 countries, covering 87.4% of the global population. Despite efforts by governments to insulate consumers from price rises, researchers estimated that overall household expenditure rose by between 2.7% and 4.8%.As a result, they estimate that an additional 78–141 million people worldwide could be pushed into extreme poverty.

Save the Whales! Stop Offshore Wind Farms! While officials deny that offshore wind farms killed whales, now native Americans have problems with off-shore wind. Oil Price is reporting that "The National Congress of American Indians (NCAI) is calling on the Biden Administration to halt all permitting and scoping for offshore wind projects until a comprehensive procedure to protect tribal interests are in place.

Natural gas is trying to bottom. It is helpful that Freeport LNG is getting back in business, and winter weather is not hurting either. The price crash more than likely is going to force some to rein in production, especially as the cost associated with shale production keeps rising.

In the short term, oil is still fighting off macroeconomic fears. But we think the tightness in the market is going to become obvious when we start to come out of maintenance. We still highly recommend being hedged going into summer because there are significant upside risks to this market. Unless there is a severe economic slowdown, we are going to be undersupplied in just a few months.