A bigger than expected Crude oil drawdown was overshadowed by a massive gasoline supply build that had more to do with year-end tax shenanigans than it did with real supply or demand. The OPEC Plus expected 400,000 barrels a day supply increase did little to soothe markets as the group is already short of their quota and almost have no chance of getting over quota, especially with Libyan oil production being off as much as 700,000 barrels a day. Oil traders are also talking about the great rebalancing as commodity index rebalancing is coming due.
While all this noise may fluctuate prices in the short term, the fundamental outlook for 2022 is looking more bullish as the lack of oil investment that we have been warned about for years, as well as pie in the sky expectations for renewable fuels, is already falling short. I guess when you try to build your energy future on technology that does not exist, you might run into a few problems.
Let’s talk about the American Petroleum Institute report first. The API reported that crude oil stocks for the week ending December 31 fell by 6.43 million barrels. That was twice expectations and another sign that Biden’s oil release from the SPR is not adding to US inventory but being sent to places like China. Yet the US API gasoline stock was reported as a build of 7.061 million compared to the previous draw of 0.319 million.
Last week they expected a build, so one who is suspicious might suspect some gasoline last week was held back for tax purposes, so the tax on the product would be deferred into the new year, clever. So it looks like we got three weeks of inventory in one week. The API also reported that distillate stocks increased by 4.34 million barrels that overshadowed the oil draw. Yet make no mistake about the global oil supply. It is tightening.
Bloomberg News is reporting that the “US Oil Market Braces for a $4.6 Billion Wave of Selling”. They point out that every January, the world’s two biggest commodities indexes — the S&P GSCI Index (NYSE:GSG) and the Bloomberg Commodities Index (NYSE:DJP) — reset, spurring a raft of inflows and outflows across commodity markets. For WTI, that means investments tracking both benchmarks could be ready to pull almost 60 million barrels worth of futures contracts from the market, according to Societe Generale (OTC:SCGLY) estimates. While this is true, the oil market knows this and based on what we are seeing. The market can absorb this amount of selling without destroying the overall uptrend. If oil can’t take out $77.00, then we could see a sharp move higher despite the rebalancing.
Javier Blas of Bloomberg is tweeting that Kazakhstan is reimposing price for controls for LPG, gasoline, and diesel after rare demonstrations over the last 24 hours over rising energy prices. The country is one of the world’s top oil producers and a member of the OPEC+ alliance. Maybe we can send them some of our SPR oil.
New York may be banning natural gas in new large buildings, but Europe is finally admitting that they’re going to need natural gas to get through the energy transition. The FT reports, “to hit its ambitious climate goals" – reaching net-zero greenhouse gas emissions by 2050 – the EU needs to mobilize a flood of capital to finance the necessary investment, funneling bank loans, bond investors and stock markets towards environmentally friendly “green” technologies and away from unfriendly “brown” ones.
Where best to draw the line, however, is far less straightforward. The scale of the task demands a radical approach; to meet its goals, the EU must start rapidly phasing out fossil fuels now. But it also requires a recognition of just how difficult it will be to deploy sufficient renewable energy. Including natural gas as a “transitional fuel” is justified, but only temporarily and with strict conditions. Partly the reasoning for labeling the fossil fuel as “green” in a proposal published at the new year is political.
Maybe New York can learn from that instead of embarking on a policy that could increase electricity costs in New York by over 70% in the next few years.
We think the rise in gasoline supplies is fake, and the outlook then is to buy brakes and gasoline and diesel. Crude oil is looking fairly strong right now, and we believe that the Energy Information Administration supply reports should be supportive. There is resistance up above, but if we can break out above 7700, it should accelerate rallies. Natural gas should also get some support from the cold weather though the charts aren’t looking particularly bullish.
The grain markets are on fire as we’re seeing a reduced corn crop in Argentina and Brazil. The lack of rain is making the soybean crop smaller, and this will add to overall support for commodities in general.
As we’ve said before, despite the ups and downs in the market, we believe the commodities are in a major super-cycle. Crude oil, grains, precious metals, industrial metals. A super-cycle doesn’t mean that the market goes straight up every day, but it does show you that we’re going into a period of being undersupplied.
There is no doubt that shortsighted thinking in the energy sector is one of the reasons why this market is very bullish going into the new year, as we have warned for many, many months. Producers and users of oil and natural gas should get hedged on breaks.