The White House continues to tell us that they are doing nothing wrong with the way they are running the economy or the country. It’s only the messaging that gets them into trouble. For example, those old-school people who look at the technical definition of a recession as “two-quarters of negative growth” need to be more open-minded. It is true that the White House does a terrible job with this messaging thing, especially when it comes to its latest press release about the Strategic Petroleum Reserve (SPR). Their messaging sent the wrong signal to the market, causing a selloff in oil prices, but that was their intention.
In their normally confusing messaging, the White House moved the oil market lower after they announced that they would sell an additional twenty million barrels from the SPR. They confused the market and caused it to sell off even though that was part of the previously announced 180-million-barrel release. In fact, the messaging was so bad that the White House had to clarify what it meant. Panicky people had to be assured that this was not an announcement of a new release but just an auction of the oil already slated for release. We know they plan to sell oil to the highest bidder, which in many cases might be a company that will export it to China or elsewhere, but that is a topic for another energy report.
The strong start to oil yesterday had a strong reversal of fortune in part because Europe agreed to a natural gas ration plan and plunging consumer confidence. Lousy consumer confidence and slowing home sales are more signs that consumers are struggling in this Biden recession. Wait, it’s not technically a recession, or even if it is, we cannot call it that. Not only did we see weak sales from Walmart (NYSE:WMT) the other day, but Adidas (OTC:ADDYY) also missed their estimates of growth as people are buying fewer soccer balls and T-shirts.
Oil is now coming back, and that should continue if we see data as we did from the American Petroleum Institute last night. Even with a 5 million barrel plus release from the SPR last week, the API reported that crude oil supplies still fell by a whopping 4.04 million barrels. On top of that, the products also saw a decrease in supply, with gasoline falling by 1.06 million barrels and inventories falling by 550,000 barrels. The trifecta of drawdowns in petroleum might suggest that demand is bouncing back after the recent price drop. It could also show some inherent strength in demand going forward.
Saudi Arabia thinks that demand is still going to be fairly good despite declining refining margins. Saudi Arabia is going to raise their selling price for crude oil to a record high. Bloomberg News reports that the world’s top crude exporter is expected to price its Arab light crude to Asia at a $10.80-a-barrel premium to the region’s benchmark for September-loading cargoes, according to the median estimate in a Bloomberg survey of five refiners. At the same time, a slump in margins for Asian processors means that such a hike may dampen any requests for extra barrels, traders said. There were also reports that Saudi upped its exports, so apparently, somebody is willing to pay the price despite record SPR releases and Russian oil exports.
The physical market for oil is very tight, and the disconnect between the futures market and the cash market should also start to come together. If that happens, that means that we should see oil be very well supported. Chart-wise, oil is at a technical juncture. Some see the charts in a choppy downtrend, but if you look at the longer-term charts, they still point up. We should get some clarity shortly on oil’s next big move, which should be up.
We will get a critical decision from the Fed today, along with the gross domestic product number, tomorrow. Any signs that the Fed is comfortable with their plan to whip inflation now with only a 3/4-point interest rate increase should give the oil a nice pop today. If the Energy Information Administration inventory numbers are in line with what we saw from the API, then that should be another reason to believe that oil prices have put in at least a short-term bottom. Even with yesterday’s weakness, we seem to hold key support above 9500 and the larger support down near 9300.
The heating oil crack spread that was under pressure in recent weeks seems to have bottomed and could be pointing towards the upside. Diesel should get a bounce from the European union’s natural gas rationing plan. We also expect to see gasoline demand bounce back to the upside in a big way. There is a lot of speculation that the EIA has underestimated demand for gasoline in recent weeks. If the EIA plays catchup, we could see a big surge in demand. Besides, even if they don’t adjust previous demand numbers, the reality is that because retail prices have pulled back, more people have filled up their cars.
Natural gas went on a historic tear, and this month has had the most incredible up move we’ve ever seen in the history of the futures contract. The heat wave in the US is driving the market along with the drama over the European gas rationing plan.
Reuters reports that Germany’s BASF (OTC:BASFY), the world’s largest chemical company, is cutting ammonia production further due to soaring natural gas prices, it said on Wednesday, with potential ramifications from farming to fizzy drinks. Germany’s biggest ammonia maker SKW Piesteritz and number four Ineos also said they could not rule out production cuts as the country grapples with disruption to Russian gas supplies.
On the one hand, if Europe rations gas demand, one might assume that that’s bearish for LNG, but the reality is what they’re going to try to do is ration gas mostly from Russia and try to replace that with good old-fashioned US LNG.
One might wonder that if the Freeport LNG export terminal were open right now, is it possible that natural gas would be closer to 10 or $12. I guess we’ll never know, but we do know that this market is very vulnerable to upside spikes. We have warned that time and time again, and worst fears are coming true.
Still, recession fears are still hot and heavy. John Kemp at Reuters reported that Caterpillar's (NYSE:CAT) share price in the three months from May to July was down by -13% compared with the same period a year ago. The heavy equipment manufacturer’s share price has been closely correlated with the OECD’s leading economic indicator. The slump is consistent with the onset of a business cycle slowdown.