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The Energy Report: The Fed's Job

Published 12/14/2023, 01:48 PM

Do we raise the “Mission Accomplished” banner over the Federal Reserve building in Washington DC? If so, energy and oil traders should be thanked for doing the Federal Reserve’s job for them. You’re welcome.

The recent crash in oil prices, which OPEC says was driven by “exaggerated concerns” about demand, has been a major factor in allowing the Fed to signal that the rate hiking cycle is over. According to the Fed Fund Futures at the CME group, the door is open to perhaps 3 rate cuts in the New Year. That puts stocks at an epic risk-on rally that looks almost scary and a big surge back in commodities that were recently depressed about the way the world was going.

The crash in oil helped the Fed in two ways. Not only did it lower inflation and inflation expectations, but it also may be signaling that oil traders are anticipating a major economic slowdown in the future. The Fed said that inflation came down in 2023 much faster than anyone expected, which in part was helped by the hedge fund sell-off in oil and the Fed does respect the predictive power of the oil futures markets.

Oh, sure the treasury markets say that they did the heavy lifting, but the Fed must respect the movements in the oil trade where the market sell-off has exceeded the current realities of oil demand and oil demand expectations. Besides, it was the energy sector that started using the canary in the coal mine. It is also very interesting that the Fed’s dovishness comes almost on the day when oil products bottom, traditionally in the second half of December. Such as heating oil which has gone up 12 out of the last 15 years and gasoline futures 13 out of the last 15 years according to Moore Research. The trend even is solid looking back 30 years.

Even the International Energy Agency, which wants to see an end to investment in fossil fuels, is saying today that they are raising their 2024 global oil demand growth forecast by 130,000 barrels a day to a growth of 1.1 million barrels a day citing improved gross domestic product outlooks.

The IEA did at the same time trim their global oil demand growth forecast for the current year by 90,000 barrels a day to 2.3 million barrels a day. I think that shows that we see a bit of a dip in demand but it isn’t catastrophic and every reporting agency so far sees demand snapping back in a short period.

That was another reason why a more dovish Federal Reserve could solidify a bottom for oil the market. That, along with the  Biden administration’s attempts to repurchase more oil for the Strategic Petroleum Reserve and OPEC’s desire to support prices even though they are losing out to market share to non-OPEC producers.

Today the International Energy Agency seemed to taunt OPEC by pointing out that their share of the global oil market share has dropped to a low of 51% in 2023. It seems the International Energy Agency is suggesting that perhaps OPEC will lose its commitment to production cuts as they see their market share be lost to other producers partly to producers in the United States. The International Energy Agency almost seems to be jeering the OPEC cartel by saying that:

“U.S. oil supply growth continues to defy expectations with output shattering the 20 million barrel-a-day mark.” Take that OPEC.


Now I’m not sure where the International Energy Agency is getting that number that the US production will hit 20 million barrels a day, but the reality is that the conflict between the International Energy Agency and OPEC is very much out in the open. OPEC has questioned the credibility of the International Energy Agency. (I have that in common with the old cartel). OPEC is warning the world that we will need fossil fuels long after many of the people reading this report are alive and the IEA is in operation.

As OPEC says, the market has exaggerated demand destruction. It seems like the International Energy Agency is being driven not by trying to provide consumer nations with energy security but by buying into the global movement to end fossil fuels no matter the economic cost or cost to your freedoms. The IEA in the past has been famous for underreporting demand and overestimating production. Now they are saying that they believe that there is mounting a slowdown in oil demand growth in the fourth quarter.

While there has been some evidence of a slowdown in demand mainly in China the reality is demand in the United States according to yesterday’s data came in higher than expected. In fact, on a four-week moving average demand according to the Energy Information Administration (EIA) is higher than it was a year ago at this time. The EIA said that based on total products supplied demand over the last four-week period averaged 19.9 million barrels a day, up by 0.6% from the same period last year.

EIA says that motor gasoline demand averaged 8.5 million barrels a day, up by 2.3% from the same period last year which flies in the face of gasoline demand destruction talk. Distillate fuel product supplied averaged 3.7 million barrels a day over the past four weeks and was down by 1.1% from the same period last year because Europe is supplied well. But Jet demand was up 1.2% compared with the same four-week period last year.

The good news is that low energy prices have brought down inflation. The flip side of that though is as the Fed becomes more hawkish prices will start to add up. One of the things that’s going to help temper the rise in oil prices is the fact that winter has not been as brutal here in the United States as some had feared.

Of course, many natural gas producers are in big trouble because of the warm temperatures. We continue to see reports of producers losing a lot of money because of the difference between the prices they have to pay to produce natural gas versus what they can sell it for. There’s a huge discrepancy between the NYMEX future prices and some of the basis prices for some of these producers. It better get cold quickly or I’m afraid we’re going to see natural gas bankruptcies. Or we’ll see them being bought out by some of the majors.

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