Sometimes it is about the numbers. After an early rally, oil prices started to fade on reports that the Biden administration is engaging the Maduro regime in Venezuela. They are desperate to get their hands on heavy oil to avoid a diesel shortage. Oil also dipped on comments from Fed Chairman Jerome Powell that suggest that he will do whatever it takes to cool inflation even if it causes some economic pain. Yet while Venezuela might be able to send a little oil and the Fed might start a recession, right now, based on data from the American Petroleum Institute (API), supplies are too tight to worry too much about what may happen tomorrow.
The API not only reported a 2.445 million barrel drop in crude oil supply but also a huge 5.102 million barrel drop in gasoline supply. It seems that refiners, so desperate to avoid diesel shortages, are focusing on distillates at the expense of gasoline. The huge 3.071 draws from Cushing, Oklahoma, may be refiners drawing whatever heavy oil they can to meet diesel demand. The API did report a modest 1.075-million-barrel distillate supply increase, but those supplies are still close to being 23% below the average range for this time of year.
Some are wondering whether or not the API is including the 5-million-barrel crude oil release from the SPR in their data. It appeared that last week they did not. So, when we get the Energy Information Administration data at 9:30 central time, we may see a crude build, but if the EIA reports similar numbers on the product side, we should see the oil and product rally gain momentum.
With talk of diesel shortages, the Biden administration is going back to Venezuela with their hand out even though the last time they tried that, it was met with bipartisan repugnance.
The AP reported that the United States government is moving to ease a few economic sanctions on Venezuela in a gesture meant to encourage resumed negotiations between the U.S.-backed opposition and the government of President Nicolás Maduro.
The limited changes will allow Chevron Corp. (NYSE:CVX) to negotiate its license with the state-owned oil company, PDVSA, but not to drill or export any petroleum of Venezuelan origin, two senior U.S. government officials told The Associated Press late Monday. The officials spoke under the condition of anonymity because the formal announcement had not been made. Additionally, Carlos Erik Malpica-Flores — a former high-ranking PDVSA official and nephew of Venezuela’s first lady — will be removed from a list of sanctioned individuals, they said.
Hours after the announcement Tuesday, the opposition and Venezuela’s government acknowledged they had begun conversations on possibly restarting negotiations.
Yet the end game would be to get some of that heavy Venezuelan crude that US refiners need to make diesel. David Asman of the Fox Business network says not so fast. Not only is it a terrible idea to deal with the Maduro regime, but their production is so small right now it might not make any difference in the short term unless the Biden administration is looking for the war in Ukraine to go on for years.
He points out that Venezuelan oil production is WAY down…under 1 million bpd. So how are they going to sell us 1 million bpd?
David Asman also interviewed the Premier of Alberta, Jason Kenney, who showed his displeasure by asking why the Biden administration is looking to Venezuela instead of Canada. Alberta Premier Jason Kenney joined “Cavuto: Coast to Coast” Tuesday, suggesting that Canada can “easily help” with gas prices if a “North American alliance” was formed. On Cavuto Coast to Coast, David Asman asked Mr. Kenny whether or not any investors were willing to invest in Canadian oil after Biden canceled the Keystone pipeline. (Watch this interview here).
JASON KENNEY:
“Alberta, Canada, is responsible for 62% of U.S. oil imports, and we could easily help you completely displace imports from Venezuela and the other OPEC dictatorships. But unfortunately, President Biden vetoed Keystone XL. That would have delivered 830,0000… barrels a day of responsibly produced Canadian energy, and we’re down here to say, let’s create a North American Energy Alliance. Let’s stop importing OPEC energy into North America. The governor of Michigan is trying to decommission a pipeline that has safely delivered over half a million barrels a day of Canadian oil to the upper Midwest, and the administration’s veto of Keystone XL has created great uncertainty for investors… Let’s work together. We can not only provide more supply to reduce gas prices and help the American economy, but we can also get North America off its addiction to dictator oil.”
Reuters reported that Federal Reserve Chair Jerome Powell on Tuesday pledged that the U.S. central bank would ratchet interest rates as high as needed to kill a surge in inflation that he said threatened the foundation of the economy. Powell said at a Wall Street Journal event:
“What we need to see is inflation coming down clearly and convincingly and we’re going to keep pushing until we see that. If we don’t see that, we will have to consider moving more aggressively [to tighten financial conditions.]"
Bottom line: there’s no doubt that higher interest rates could slow down energy demand, but I don’t think that’s going to alleviate the tightness in the near term. We believe that even though energy prices are ridiculously high, the economy seems to be surviving the blow, at least right now. Industrial production numbers were solid, and even though we’re seeing consumer confidence drop. Retail sales are hanging in relatively strong.
Another explosive day and natural gas yesterday; however, we are seeing a bit of a pullback today. EBW Analytics reports that natural gas pressed higher early this week on strengthening heat and softening supply, with technical suggestive of further near-term upside. Strong Texas heat and soft production this spring have reduced the ability to make a dent in the storage deficit vs. the five-year average. In addition to lowering the storage trajectory, upside pressure is building for early summer. The wide distribution of potential end-of-injection season storage outcomes for natural gas. The not-insignificant possibility that storage stumbles under 3.25 Tcf could send NYMEX futures sharply higher as the market increasingly prices in further substantial upside price risks.
We have been talking about some upside risks for a while, and on both the product side and the natural gas side, there may be some option strategy strategies available that could help you with your hedging or your speculation.