Yahoo! We got through more than 24 hours without a bank failure and that put an upward tilt to oil that has been divorced from supply and demand fundamentals! Fears that First Republic Bank (NYSE:FRC) was on the brink have gone away as other bankers work on plans to shore up the bank along with a $30 billion dollar cash infusion causing the shares to rise by over 20% this morning.
It appears that UBS (NYSE:UBS) got the buy of the century by stepping in to take over the assets of Credit Suisse (NYSE:CS) and now will become the world's largest wealth manager on the globe. Now there is talk that the US Treasury is looking at the possibility of offering a guarantee to all depositors of any amount in a US bank for a limited time which could solve the banking crisis of confidence in the short run but raises the possibility of moral hazed problems in the future. Eat. drink and be merry because the Reaper is a little further away.
So, will a guarantee stop the run on the banks? It should. Almost everybody believes that this crisis in the banking sector is because of the withdrawal of deposits and not mainly because of any capitalization issues with any bank. The FDIC and the treasury are looking at the legality of the ability for them to use their funds to make this guarantee without the approval of Congress.
Behind the scenes, we believe that the problems in the banking sector, in large part, had been exasperated by the Federal Reserve’s attempts at micromanaging the economy. I believe that part of the problem with these banks is not just the historically fast interest rate increases but also the way Fed speakers in between meetings would scold the market when it did not act the way it wanted it to. It seemed like when risk assets were rising, the Federal Reserve would tell us that the market had it wrong and that they were serious about raising interest rates. No Kidding.
The Federal Reserve probably should have kept quiet because they had already previously signaled their mission. Yet the markets have a better way of looking ahead and are a bit smarter than the Feds. Sometimes, even if the markets have it wrong, it might have allowed some people in positions and interest rates to maneuver a bit before we saw the full impact of the Fed interest rate increases. But that means the Fed needs to focus less on the markets and more on their job. The fiscal and fed policy that was designed to reduce inflation and in in part lower oil prices might have the opposite effect in the long run.
The break in the oil prices will cause a reduction in oil production investment, which will worsen the long-term structural shortage in the oil market as we move forward. It isn’t just me that is saying this, but the CEO of Trafigura, Jeremy Weir, is warning that current oil prices are not encouraging production. He also believes there will not be too much downside for oil from this level.
The Intergovernmental Panel on Climate Change is once again warning about the end of the world unless we spend billions and trillions of dollars on climate change, or as I like to call them, the intergovernmental panel that cried wolf once again to justify massive spending on climate change. The panel is using scare tactics that the sky is falling. We’re supposed to ignore all the other scare tactics they’ve used over the last 25 years that have failed to come true. The panel says that deep, rapid, and sustained cuts to greenhouse gas emissions are urgently needed to keep climate change within livable limits.
They fail to point out that normal climates mean longer growing seasons and the ability to grow more food. They also don’t point out that more people die from severe cold weather than warm weather. The ties between hurricanes and climate change have been disproven time and time again and so much for the drought in California now they’re being flooded with water. The global climate has been changing up and down since time began. This is normal.
The reality is that the demand for oil unless the global economy falls apart, is going hit an all-time high this year. The Energy Information Administration reported yesterday the US petroleum exports out of the United States hit a record high. Exports for petroleum product exports, up 7% from 2021, according to our Petroleum Supply Monthly. U.S. petroleum product exports averaged 5.97 million barrels per day (b/d) in 2022 (405,000 b/d more than in 2021) driven by an increase of 18% (193,000 b/d) in distillate fuel oil.
U.S. distillate fuel oil exports in 2022 averaged 1.26 million b/d, which remained below pre-pandemic volumes. In 2019, exports averaged 1.31 million b/d. Although U.S. distillate exports to Europe noticeably increased, the United States sent most of its distillate fuel oil exports to Latin America. U.S. exports of motor gasoline also increased in 2022, and unlike distillate exports, exceeded 2019 volumes, coming in at their highest annual average on record. Mexico has historically received the most U.S. gasoline exports, which was still the case last year.
Besides that, the copper market held up pretty well which is probably a strong signal for oil. Trafigura says they expect to see a new record high copper price and expects that within the next year it could break $12,000 a ton.
Even during the turmoil, product crack spreads have held up pretty good signaling very tight supplies. Chinese oil imports are also near record highs. Expectations are that we’re going to see a significant drawdown in petroleum supplies in this week’s report which should give us a boost. On top of that, spring is going to cause a surge in demand for gasoline in the summer driving season that is getting closer every day.
Natural gas is still struggling. A late cold snap is giving us some support and we’re expecting to see a pretty good drawdown in inventories next week. Yet the market is still struggling with concerns about the global economy.