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The Energy Report: Good News Or Bad News?

Published 08/18/2022, 09:51 AM
Updated 07/09/2023, 06:31 AM
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The good news is that according to the Energy Information Administration (EIA), petroleum demand in the United States is a lot stronger than they suggested just a couple of weeks ago. The bad news is that if demand is that strong, it’s clear that the United States is going to face significant challenges because supplies are so far below normal. 

Oil prices have been crushed in August on recession fears, talk of a potential Nuclear deal with Iran, and signs that the Chinese economy is faltering and that their oil demand is lagging.

President Xi Jinping is getting ready to start his third term and is dropping hints about reopening his economy in China. The EIA pointed out that the U.S. and China’s oil consumption is down since the start of the war but recovering now. We have yet to hear from the United States about the response to the Iranian proposal that was in response to the West’s final and best offer.

I hate to say this, but the truth is that if these aforementioned concerns do not weigh on demand as much as people fear, then we are poised for another major price spike in oil and petroleum as we get back to winter. Remember how the market fell apart when they saw a substantial drop in gasoline demand a few weeks ago? U.S. demand was strong, with both gasoline and distillate (diesel) consumption close to normal and back to 2019 levels.

This week the EIA reported that gasoline demand jumped back to 9.348 million barrels a day. That demand number was slightly higher than where we were the same week a year ago. Distillate demand actually increased to 3.925 million barrels a day and was up 200,000 barrels a day from last week but down 398,000 barrels a day from where we were a year ago. The EIA said that demand for total products supplied over the last four-week period averaged 20.2 million barrels a day, down just by 3.2% from the same period last year. Over the past four weeks, motor gasoline products supplied averaged 9.1 million barrels a day, down by 4.2% from the same period last year. Distillate fuel product supplied averaged 3.8 million barrels a day over the past four weeks, down by 4.7% from the same period last year. Jet fuel product supplied was up 5.6% compared with the same four-week period last year.

Yet supplies are not getting better even with slightly weaker demand and record release from the Strategic Petroleum Reserve. The EIA said that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 7.1 million barrels from the previous week. At 425.0 million barrels, {{8849|U.S. crcrude oil inventories are about 6% below the five-year average for this time of year.

Total motor gasoline inventories decreased by 4.6 million barrels last week and are about 8% below the five-year average for this time of year. Distillate fuel inventories increased by 0.8 million barrels last week and are about 23% below the five-year average for this time of year. Propane/propylene inventories increased by 2.3 million barrels last week and are about 8% below the five-year average for this time of year. Total commercial petroleum inventories decreased by 9.2 million barrels last week.

Gurgen Ayvazyan puts that in perspective by pointing out that 32 weeks into the year: Commercial crude oil inventories are up by 7.1 million barrels, but SPR inventories are down a whopping 132.6 million barrels. Gasoline inventories are down 17 million barrels, and distillates are down 13 million barrels. These numbers are not comforting as you go into winter and are one of the reasons we continue to suggest that hedgers get hedged to protect themselves from a major price spike.

Shale hedgers that locked in small profits left a lot of money on the table; still better safe than sorry. Zerohedge By Rystad Energy U.S. shale oil producers is in line to suffer more than $10 billion in derivative hedging losses this year if oil prices remain around $100 per barrel, Rystad Energy research shows. Many shale operators offset their risk exposure through derivative hedging, helping them to raise capital for operations more efficiently. Those who hedged at lower prices last year are in line to suffer significantly associated losses as their contracts mean they cannot capitalize on sky-high prices.

Reuters is reporting that U.S. oil companies are working around a century-old shipping law to supply fuel to the U.S. East Coast, according to data from Refinitiv and oil trading sources, as high demand for gasoline and global disruptions in fuel markets sent prices higher. Traders are increasingly sending unfinished gasoline components from the Gulf Coast to Buckeye Partners LP’s terminal in the Bahamas, also known as Borco, where they are blended into finished gasoline to be sent to the U.S. East Coast. The uncommon trade is a sign of heavy demand for products up and down the coast, home of some of the nation’s largest consumer markets.

European natural gas prices are higher again in Europe. That should be bullish for oil as well. It is also bullish for U.S. natural gas. The fundamentals for natural gas are wildly bullish, but chart-wise, both the daily and monthly charts look challenging to say the least. Comparatively speaking, oil, heating oil, and gasoline look cheap compared to natural gas. We may see that spread start to come in with natural gas struggling to make new highs, at least in the short term, and diesel crude and our RBOB play catchup. Today’s natural gas report may be a big factor in whether we can break through that resistance on the upside or fall back.

Dan Molinski at the Wall Street Journal writes that U.S. government natural-gas data due Thursday are expected to show inventories rose last week by a below-normal amount as hotter-than-normal weather hung around in many regions, including Texas and the Northeast.

The Energy Information Administration is expected to report that gas-in-storage levels increased by 35 billion cubic feet during the week ended Aug. 12, according to the average forecast of 12 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. EDT Thursday. Estimates range from increases of 26 bcf to 44 bcf. The average forecast compares with a 46-bcf increase in storage last year and a 47-bcf five-year-average rise. A 35-bcf increase last week would mean gas stocks totaled 2.536 trillion cubic feet, 10% below last year’s total at this time and 12% below the five-year average for this time of year.

The market has maintained a bullish inventory deficit compared to averages throughout 2022. While the Jun. 8 shutdown of the Freeport LNG plant in Texas has hurt feedgas demand, excessively hot summer in key consumption regions such as Texas has helped to offset nearly all of that reduction in LNG-related demand.

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