Oil markets had to fight Fed Chairman Jerome Powell, who is on a mission to defeat inflation regardless of the markets and economy’s collateral damage. The Fed chair said he would keep at it and not only raised the Fed’s inflation expectations, but also its potential. The bold statements caused major ramifications across global currency markets as the U.S. dollar surged to a 20-year high. The movement in the dollar caused the exchange rates of oil and other commodities to be stretched beyond their normal dimensions.
The Fed’s aggressive stance is going to force other central banks to raise interest rates or fear having their currencies get squashed like a bug on the windshield. To the emerging markets and other economies around the globe, Powell inferred when it comes to an adversely hawkish rate policy, either you’re with us or you’re against us.
Yet, you have one country, Japan, that refused to play the rate-increasing game. Japan decided to intervene in the currency market by selling dollars and buying yen for the first time since 1988. Japan does not want to be bullied by traders or by the Federal Reserve to abandon its negative-interest-rate policy and, instead, put the carry trade traders on notice that this will not be a simple one-way trade.
Yet when it comes to oil, Powell perhaps had better hope that he pushes the U.S. and the world into recession because, based on what we saw in yesterday’s inventory report, the odds of a potential crude spike this winter has not gone away. Not only that, but lower oil prices, also driven by a strong dollar, may further discourage much-needed oil investment to meet demand, now and after the Powell’s inflation-fighting crusade.
The Energy Information Administration reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.1 million barrels from the previous week. At 430.8 million barrels, {{0|U.S. crude oil inventories}} are about 2% below the five-year average for this time of year. The obvious problem is that without a huge release from the Strategic Petroleum Reserve, U.S. inventories would have seen another major 6.9-million-barrel drawdown, as our SPR barrels get exported overseas.
That release from the SPR reserve means crude oil supplies in the Strategic Petroleum Reserve are now lower than that of commercial inventories. That fact is going to be the reason why the Biden administration is going to feel more pressure to refill the reserve. With the tropical storm in the Atlantic and a lot of storm activity brewing, the odds of a storm-induced price spike are much higher than they were before Biden decided to export most of our Strategic Petroleum Reserve to other countries. This is a concern as more storms seem to be developing off the coast of Africa.
There was also a lot of talk yesterday about the weak demand numbers that we’re seeing from the Energy Information Administration report when it comes to things like gasoline and diesel. Most people believe that the weekly demand numbers from the EIA are incorrect and understating demand, and they have a lot of evidence for this conclusion. The EIA yesterday said that gasoline supply increased by 1.6 MMB, in line with seasonal norms, and supply overall has fallen 18 million barrels this year. Yet, the EIA reported that over the past four weeks, motor gasoline product supplies averaged 8.5 million barrels a day, down by 7.7% from the same period last year.
Yet, as market watcher Tim Dallinger pointed out that if you look at miles driven, the weak demand numbers do not add up. The Department of Transportation reported that the 12-month moving average of a mile travelled for June is the fifth highest move on record. The EIA explains the discrepancy between this statistic and the implied demand by suggesting current vehicles are more efficient. This is wrong. The latest S&P Global Mobility report demonstrated the average age of on-road vehicles hit an all-time of 12.2 years.
The EIA also reported that distillate fuel inventories increased by 1.2 million barrels last week and are about 18% below the five-year average for this time of year. Yet, the EIA reports that distillate fuel product supplied averaged 3.4 million barrels a day over the past four weeks, down by 15.7% from the same period last year. Jet fuel product supplied was down 4.7% compared with the same four-week period last year.
So the question I keep asking is if demand is so bad, why are inventories still so tight? Even though we gained some ground, inventories are below average in every major category. Now you add the fact that strategic petroleum reserve supplies are lower than commercial inventories, and we’re in a situation where there is no supply-side buffer. OPEC is also warning that there is no buffer when it comes to spare production capacity in the globe. In the short term, the oil market fights the Fed and fights the dollar regardless of the value of the actual barrel it’s not going to keep you warm in winter if there’s no supply to be had.
Now you have Putin desperately warning that he would use all means necessary to win the war in Ukraine and that possibly means a cut off of European oil and gas supplies. That’s another added risk that could give us some upside potential.
Reuters is reporting that, “At least three Chinese state oil refineries and a privately run mega refiner are considering increasing runs by up to 10% in October from September, eyeing stronger demand and a possible surge in fourth-quarter fuel exports, people with knowledge of the matter said. Chinese refiners are expecting Beijing to release up to 15 million tonnes worth of oil products export quotas for the rest of the year to support the no. 2 economy’s sagging exports. Such a move would signal a reversal in China’s oil products export policy, add to global supplies and depress fuel prices.
California’s Governor Gavin Newsome is anti-fossil fuels and wants to ban gas cars for electric, but it was fossil fuels that saved California from a major blackout. The Energy Information Administration (EIA) reported that the extreme heat wave affected California the week of Sept. 4, driving record-breaking demand for electricity to meet increased air-conditioning use. On Sept. 6, a new record was set in the California Independent System Operator’s (CAISO) territory.
CAISO, the grid operator for most of the state, issued appeals for consumer energy conservation throughout the week, as well as Energy Emergency Alerts each day, to help reduce electricity demand and prevent rolling power outages. CAISO predominately used natural gas, electricity imports and hydroelectric sources during the highest demand hours to meet the record-breaking demand, which was a change from the typical mix.
For brief periods during the week of Sept. 4, CAISO used natural gas for as much as 60%—and never less than 30%—of the generation mix to meet electricity demand. California typically uses a mix of solar, wind, imports, hydroelectric and natural gas sources for electricity generation. The exact mix depends on the time of day, the availability of sources, and the price that power plants set to sell electricity to the grid. 40% from solar, wind, nuclear, batteries and other sources 32% from natural gas 20% from imports, 7% from hydroelectric.
The mix relies slightly more on natural gas during the evening hours, when electricity demand peaks and solar generation wanes. During the week of Sept. 4, however, natural gas contributed nearly one half of the resource mix in CAISO; nuclear, solar, wind, batteries and other resources decreased to a 24% share. In California, natural gas units are often the last resource turned on to meet demand because they can be turned on after the sun sets in the evening when cooling demand remains high. When demand reaches record highs, seldom-used (less efficient, more expensive) natural gas units are needed to meet demand.