Oil prices took away its ‘war premium” after Saudi Arabia gave assurances that they would keep the oil flowing and so far supply has not been impacted. Saudi Arabia suggested that they would allow all flows of their oil to anybody who wanted to buy it but at the same time along with Russia, they decided to keep their production cut in place until the end of the year and even suggested that they would go on beyond the new year. Biden is warning Iran to “be careful” but it is not clear that they have any plans to enforce sanctions on their oil. Yet Biden continues to enforce sanctions of a sort on the US shale industry with a slew of lawsuits, executive orders, etc. which is taking out OPEC’s biggest opponent according to Pioneer C.E.O. Scott Sheffield who just sold his Company Pioneer to Exxon (NYSE:XOM).
But back to supply assurances first. The International Energy Agency also said that they will “continue to monitor the oil market closely and, as ever, stands ready to act if necessary to ensure markets remain adequately supplied. Yet at the same time acknowledged that even though the recent price spike has caused some early signs of “demand destruction” the global oil markets are undersupplied. The IEA said:
“Evidence of demand destruction is appearing with preliminary September data showing that US gasoline consumption fell to two-decade lows. Buoyant demand growth in China, India, and Brazil, nevertheless underpins an increase of 2.3 million barrels a day (mb/d) to 101.9 mb/d in 2023, of which China accounts for 77%. Growth slows to 900 kb/d in 2024, as efficiency gains and a deteriorating economic climate weigh on oil use.”
They still predict that the market is still undersupplied and will be all year long. The IEA says that global oil demand will grow by 2.3 million barrels a day in 2023, followed by 900,000 barrels per day in 2024. They say the market remains in deficit but will turn into a surplus in the first half of next year. Yet I would not count on that because so far, the IEA has a strong track record of consistently underestimated demand. I do not buy this so-called “demand destruction” talk because I think it is premature, but the American Petroleum Institute (API) weekly inventory report has me going back to the drawing board.
Despite reports by gas stations that demand surged last week as prices broke, the API reported an astounding 3.645 million barrels last week. That is the second week in a row where we have seen a much larger than expected increase in gasoline supply and based on some of the other data we are seeing, it really does not make sense. We will look at the Energy Information Administration (EIA) to see if they confirm and whether the demand drop is because exports stopped. Or is it because everyone bought an electric car over the weekend?
If you thought the gasoline number was a shocker, how about one of the biggest weekly supply increases in history? That’s right, the API outdid itself by reporting an equally stunning 12.94-million-barrel crude oil supply increase. I know we’re in refinery maintenance season and exports were probably poor but really, 12.94 million barrels?! That’s off the map.
While we may take comfort in the fact that we saw a big surge in crude and gasoline, the soft spot in the global energy market continues to be distillate inventories. The API reported a very large 3.535-million-barrel drop. This came the same day that John Kemp at Reuters wrote that, “Global distillate fuel oil inventories remain much lower than normal for the time of year but there are signs they are no longer falling which has eased some of the upward pressure on prices. Mr. Kemp points out that, “Stocks in all the major consuming regions were severely depleted in September, despite a prolonged slowdown in manufacturing activity and freight movements over the previous year.
U.S. distillate fuel oil inventories averaged 21 million barrels (-15% or -1.21 standard deviations) below the prior ten-year seasonal average in September. European distillate inventories were 25 million barrels (-6% or -0.84 standard deviations) below the seasonal average at the end of September. Singapore distillate stocks averaged 3 million barrels (-23% or 1.30 standard deviations) below the seasonal average in September.
Yet Kemp says that, “in every case, the deficit had narrowed slightly compared with August as high prices curbed consumption and strong refining margins encouraged maximum fuel production. Yet after the API that might be a sign that we are now heading back in the wrong direction. We had better hope for a warm winter to save the global distillate market once again. Or you better wipe the snow off your solar panels if you have them.
Besides, in a world where we’re still going to need oil for the foreseeable future, we continue to allow OPEC to dictate our fossil fuel future. Shale CEO Scoot Sheffield is warning that, “OPEC’s Greatest Opponent Is Disappearing” and that it was the US Shale industry that has undermined OPEC’s grip on oil markets according to an interview with Bloomberg News. Bloomberg writes that:
“Shale companies cannot survive on their own long term”
Sheffield said during an interview with Bloomberg Television on Wednesday:
“They’re going to have to merge up, consolidate, and be part of diversified companies.”
The consolidation of small and often closely held shale specialists will eliminate a thorny problem for Saudi Arabia and its fellow OPEC members. Independent drillers played a major role in diversifying global crude supplies over the past decade, weakening the ability of a handful of major producers to hold sway over energy markets, according to Bloomberg.
Mr. Sheffield’s comments are another reason why the United States, for the purposes of the economy and national security, needs to rethink its anti-fossil fuel energy policy. Once again we saw War Premium pop the market and then drop it. Now we’re back to supply and demand fundamentals. Despite supply assurances, we are not convinced that there won’t be some impact on the global supply chain for oil and natural gas. We believe that we’re very close to the bottom of the correction and we think there’s a significant upside risk over the next couple of months.
Reuters reported that “A subsea gas pipeline and a telecommunications cable connecting Finland and Estonia under the Baltic Sea have been damaged in what may have been a deliberate act, the Finnish government said on Tuesday. NATO Secretary General Jens Stoltenberg said NATO was sharing its information about the damage and stands ready to support the allies concerned. Finland joined the military alliance in April, while Estonia has been a member since 2004. The Baltic connector gas pipeline was shut early on Sunday on concerns that gas was leaking from a hole in the 77-km (48-mile) pipeline. Finnish operator Gasgrid said it could take months or more to repair.
Natural gas prices here in the US are near resistance. Today’s report at 9:30 central time could be a turning point for the next move. If we get a bullish report and break out to the upside, we could see a significant move but more than likely we’re going to pull back just a bit. Still, going into winter, use any breaks to put on some long-term bullish strategies.