For oil, the expectations for a recession and the banking system's health are intertwined. By almost every supply and demand metric, the move in oil is way overdone on the downside, but that won’t matter if the regional banks continue to fail. Yet oil is surmounting an attempt to get back in line with supply and demand reality as there are signs that the banking woes could stabilize. Not only do we see a significant rebound in PacWest Bank shares, the bank voted the next most likely to go under by the trader student body, but also the fact that the amount of money that banks were borrowing from the Fed discount window fell to $5.3 billion down from the $73.9 billion last week.
Part of that is that First Republic Bank (OTC:FRCB) failed and was bought out by JP Morgan, yet the steep drop is giving banks and oil a boost. Some also point to a complaint by The American Bankers Association, or ABA, that reportedly called on federal regulators to investigate significant short sales of publicly traded banking stocks that were “disconnected from the underlying financial realities.” The ABA said it had also observed “extensive social media engagement” about the health of various lenders that was out of step with general industry conditions, reported Reuters, citing a letter written to the Securities and Exchange Commission Chair Gary Gensler. In other words, accusing social media members of trying to profit from starting rumors and runs on some banks.
You can be sure that our friends in the OPEC cartel are watching these developments very closely. Already group members have shown their displeasure with how the market has been out of whack with market fundamentals, not to mention their displeasure with price caps and what they see as unjustified strategic petroleum reserve releases. Sources I have spoken with believe that OPEC is only a few dollars away from another surprise production cut if this market does not recover soon.
Now a lot of folks were making a big deal about the Saudis lowering their official selling price for oil to Asia after three months of raising them. They said that this was a sign that demand in Asia was cratering. Yet the official selling price (OSP) for June-loading Arab Light to Asia was reduced by 25 cents a barrel from May to $2.55 a barrel over Oman/Dubai quotes, according to a statement issued by state oil giant Saudi Aramco (TADAWUL:2222). The cut is less than the market expectation of 40 cents and a sign of confidence that the demand outlook in Asia, in their opinion, is still solid.
I spoke with former OPEC Advisor Anas Alhajji, who said the only reason Saudi Arabia adjusted the price was to appease some long-term customers about some contracts. The price cut was insignificant to the Saudis and not a sign that they were betting on a drop in Asian demand growth. He also dismissed tensions with Saudi Arabia and their best buddies Russia over Russia’s seeming lack of compliance with production cuts. He pointed out that Russia’s Deputy Prime Minister Novak said Russia is committed to its pledge of a 500,000 barrel-a-day output cut from February. The Saudis, he said, are not sweating it.
The other big issue with Saudi Arabia is how the Biden administration bungled relations with our long-time ally. The heavy-handed foreign policy of trying to make Saudi Arabia a “pariah state” and freezing weapons sales to the country pushed Saudi Arabia closer to Russia, China, and even Iran. Saudi Arabia recently normalized its relationship with Iran, its long-term foe, even as Iran continues to compensate well tankers in the Strait of Hormuz. This has become a dangerous situation that the Biden administration will try to rectify. Reuters reports that “White House national security adviser Jake Sullivan said on Thursday he would travel to Saudi Arabia this weekend for talks with Saudi leaders, as the United States seeks to bolster often-frayed ties with Riyadh. Speaking at a think tank conference, Sullivan also said the United States will “take the necessary action to ensure that Iran does not acquire a nuclear weapon” and still seeks a diplomatic outcome to the challenge posed by Tehran.” Now the question becomes whether Mr. Sullivan will shake hands with Crown Prince bin Salman or give him a fist bump. Stay tuned! The World Is Watching.
India has been a primary beneficiary of cheap Russian crude. The problem is that it is getting harder for India to pay Russia for the oil. Reuters report that India and Russia have suspended efforts to settle bilateral trade in rupees after months of negotiations failed to convince Moscow to keep rupees in its coffers, two Indian government officials and a source with direct knowledge of the matter said. This would be a significant setback for Indian importers of cheap oil and coal from Russia, who were awaiting a permanent rupee payment mechanism to help lower currency conversion costs, according to Reuters.
Yet Russia has other issues. AFP Reports, “A fire broke out at an oil refinery in southern Russia on Friday, a day after authorities confirmed a drone attack, Russian state-run news agencies reported. Agencies gave conflicting reports about the cause of Friday’s blaze at the oil refinery’s reservoir in the southern Krasnodar region’s Ilsky settlement.”
Now if oil prices get back in line with fundamentals, we could bet on a big recovery spike, But will that show up at the gas pump? Yes, but it should not be as bad as last year, as the refiners are coming to the rescue!
Javier Blass on Bloomberg wrote, “Global net oil refinery capacity fell in 2021 for the first time in more than 30 years, but in 2023-24 it’s set to post its more robust two-year growth since 1977 He says that “RBC Capital Markets LLC, an investment bank, reckons that net global refinery capacity will increase by 1.5 million barrels a day this year, and another 2.4 million next year According to the bank, the combined 2023-24 boost is the most significant two-year increase in net global refining capacity in 45 years But Blass says that “The buildup is, in part, a fluke: Refinery projects got delayed over the pandemic, with many of them now coming online simultaneously in places such as Kuwait, Nigeria, Mexico and China Happenstance or not, the increase nonetheless marks a turnaround for the oil industry In 2021, net global refining capacity fell for the first time in 30 years as the pandemic forced some plants to close Exxon Mobil Corp (NYSE:XOM). is emblematic of the new trend Last month, it fired up expanding its plant in Beaumont, Texas With 250,000 barrels a day of extra capacity, it is the most significant addition in the US in more than ten years.
Natural gas was struggling. Yesterday's injection was slightly above average expectations, and the demand outlook looks subdued. Yet, with signs that production is stalling and the outlook for demand rising, especially with the potential stabilization in banking, it might be time to start looking at calls Zman’s Energy Brain points out that the natural gas inventory came out at 54 Bcf vs. Street at +52. Our around +55 estimate puts storage at 2,063 Bcf, which is 507 Bcf above a year ago and 341 Bcf above the 5 yr Zman says that we remain on track for a sub 3.8 Tcf peak in storage, suggesting that prices are overdone on the downside.