The Energy Report: She Said He Said

Fed chairman Jerome Powell seemed to give confidence to the markets in his post-Fed rate hike press conference. Still, Treasury Secretary Janet Yellen at the same time, speaking about Biden’s budget, seemed to take some of that confidence away. Both speaking at the same time seemed to bolster confidence, but some of the ill-advised phrasings of answers by Janet Yellen seemed to offset a more balanced tone from the Fed Chairman.

Oil prices are also looking for confidence as the banking crisis of confidence as we already alluded to, saw one of the biggest oil and petroleum futures and option liquidations in history. Yet if the market becomes convinced that this banking crisis is under control, will money flow back to petroleum, where all the data points to wildly bullish fundamentals.

The Fed’s statement yesterday said that the US banking system is sound and resilient. They also acknowledge that recent developments are likely to result in tighter credit conditions for households and businesses and could weigh on economic activity, hiring, and inflation. The extent of these effects are uncertain. They wanted to assure the markets that they remain highly attentive to the inflation risks.

Jerome Powell also said that he did not expect that the Federal Reserve would cut rates later in the year. The Fed fund futures sees it a different way. They are pricing in increasing odds of a rate cut later in the year.

Yet market optimism seemed to be zapped when Janet Yellen said quite indelicately said that, “the failure of a small community bank could trigger bank runs as much as a larger bank failure.” while that is true it was not exactly the type of statement that inspires confidence in a market that already has had its confidence shaken. Treasury Secretary Yellen also said that, “we are not considering ensuring all uninsured bank deposits”. That was a proposal that was floated earlier and seemed to alleviate fears that if you had your money in a regional bank that you should probably move it. Yet even considering the possibility that their deposits were safe, really provided the confidence that helped to stop another run on the banks. So, I guess I would have answered that question slightly differently. I would have said that they were still studying it even if the odds of a full-blown run of all bank deposits was unlikely.

At the end of the day, Silicon Valley Bank had all their depositors covered. I would have at least left open the possibility that the treasury and the banking authorities could once again, in the event of emergency, back all uninsured depositors. Don’t get me wrong. I’m not looking for the government to back all uninsured depositors. Yet I do think that when you help create a crisis by trying to micromanage the markets with too much talk and too little action on inflation, or at least delayed action on inflation, then you must be a lot more careful the way that you present your plans to fix what you have had a big part in breaking.

The crisis of confidence has not hit global oil demand yet. In fact, quite the opposite. According to the Energy Information Administration (EIA), US petroleum exports surged to a whopping 12 million barrels a day, a near-record high as the world is sucking down fossil fuels like crazy.

This is out of touch with the massive petroleum liquidation. John Kemp at Reuters pointed out that, “Portfolio investors dumped petroleum futures and options at one of the fastest rates on record in the early stages of the banking crisis.” Reuters showed that hedge funds and other money managers sold the equivalent of 139 million barrels in the six most important futures and options contracts over the seven days ending March 14. The volume of sales was the 12th largest in the 522 weeks since ICE (NYSE:ICE) Futures Europe and the U.S. Commodity Futures Trading Commission started to publish records in this form in 2013.

Fund managers have sold a total of 148 million barrels since the end of January, taking their combined position to 432 million barrels (20th percentile for all weeks since 2013).In the most recent week, there were heavy sales of Brent (-65 million barrels), NYMEX and ICE WTI (-59 million), U.S. gasoline (-12 million) and European gas oil (-7 million), with only minor buying of U.S. diesel (+4 million).

Now add to that data from the EIA that shows not only robust demand but extremely tight supply.

The EIA reported a 1.1 million barrel increase in crude supply, but a million-barrel drop in Cushing, Oklahoma. The EIA says that supply is 8% above average but that ignores the record drop in Strategic Petroleum Reserve Supply.

Yet a massive drop in products should cause some concern as the EIA showed that motor gasoline inventories decreased by 6.4 million barrels from last week and are about 4% below the five year average for this time of year. And distillate fuel inventories down by 3.3 million barrels last week and are about 9% below the five-year average for this time of year. Weekly demand for gasoline and diesel increased and total petroleum demand hit 20.26 million barrels a day.

What is clear is that demand destruction for petroleum products around the globe have not been adversely impacted by interest rate increases so far. Any demand weakness that we’ve seen because of higher rates seems to be offset by the reopening of China and the fact that Europe must be very aggressive in securing supply because of the risks that they face.

Even though petroleum traders dumped futures because of uncertainty surrounding the banking crisis, they may have to buy them back especially because global central banks are going to be a little bit more dovish than they were before. We would fully expect that at some point oil prices are going to have to come back because the wholesale dumping of oil positions were based more on fear than reality.

OPEC is not getting shaken by the recent sell off. They said that they are likely to keep on course with their 2 million barrel a day production cut until the end of 2023 despite the price drop that would suggest that OPEC has a lot of confidence that that demand is going to hold up. In fact everywhere you look when it comes to OPEC pricing, it appears that demand is continuing to be strong for OPEC supply.

Today we get the natural gas report. My expectation is that we will see a sizable 76 BCF withdrawal from supply. There were a lot of people who wanted to be long natural gas for the long haul, and I don’t blame them but it’s just a very difficult trade in the short term. I think natural gas futures are going to be a bit rangebound with an upward bias later in the year.