The Energy Report: Worry Wart

Oil traders have become a pack of worry warts as recession fears are overtaking real supply fears in what seems to be our typical mid-year independence week oil price correction. The massive erratic price slide suggests that somehow the market believes that demand destruction will somehow solve the global oil supply shortage. Yet the demand side may not have gotten the message.

Despite the dramatic moves, if you look at the time spreads in the futures curve, it has not changed but continues to signal supply tightness for the foreseeable future. While we still may see more downside, hedgers should look at this break as an opportunity to lock in supply because the fundamentals are still dangerously bullish.

China’s lockdown fears also have played into the recent market weakness, but a new report from Bloomberg does suggest that China’s oil demand might not stay sub-par for long.

Bloomberg wrote that China’s Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year, an unprecedented acceleration of infrastructure funding aimed at shoring up the country’s beleaguered economy.

That means China will be building back better, no doubt, with some of the oil they bought from the US Strategic Petroleum Reserve. US oil released from the US reserve has been exported since day one, and now that fact is being picked up by the press as they rightly ask, why in the world would we be doing this. It is easy. Because Biden tried to deflect blame for rising gas prices away from his energy policies. He can’t blame Russian President Putin for that. Remember, Biden first released oil from the reserve in November, well before the Russian invasion of Ukraine.

Yet, despite the abuse that the US oil and gas industry has taken from the Biden administration, they still work around the opposition from this administration to take risks and invest money so that the world can be supplied with oil and gas.

The Wall Street Journal reports that Shell (LON:RDSa) has plans to drill in the Gulf of Mexico even as the Biden administration sends mixed signals on drilling. The Journal writes:

“Shell’s continued ambitions in the Gulf are on full display in a sprawling fabrication yard in southeast Texas."

There, the company is putting the finishing touches on Vito, its 13th major offshore project in the region, with a cost of around $3 billion, according to energy consulting firm Wood Mackenzie, shared by Shell and its partner, Norway’s Equinor ASA (NYSE:EQNR). Later this month, three tugboats will tow Vito to waters around 4,000 feet deep, some 150 miles southeast of New Orleans, where it will start pumping oil and gas from eight wells. The investment decision on Vito was made in 2018, and Shell will need to invest billions of dollars more in years to come just to maintain current Gulf production levels, said Paul Goodfellow, the UK oil company’s global head of deep-water operations. He said the company is confident in a long-term future of steady returns in the Gulf, despite mixed signals from the Biden administration.

Another big release from the Strategic Petroleum Reserve helped US crude supplies rise by 3.825 million barrels last week, according to the American Petroleum Institute. If you’re looking for signs of demand destruction, you’re not going to see it on the product side. The API reported that gasoline supplies fell by 1.814 million barrels and distillate inventories fell by 635,000 barrels.

In today’s report, a lot of traders will be focused on the demand side of the equation. Mixed signals about gasoline demand over the 4th of July holiday has traders on edge. Probably an argument for the recent sell-off in oil prices is that consumers in the United States that have been beaten up by bad economic policy will keep their wallets in their pockets and not spend money on gasoline. If that’s the case, we should continue to see gasoline prices come down at the pump, which will come down more anyway because of the big sell-off we’ve seen. On the physical side of the market, enjoy these low prices for a while because once we get this big correction at the pump, it’s probably not going to get back down below $4 anytime soon. We think we’re in a new era of higher gasoline prices but let’s face it, anything under $5 for some people seems cheap.

Don’t forget today that you can get 2 reports from the Energy Information Administration (EIA) for the price of 1! At 9:30 am central, we get the natural gas injection report. We are looking for an injection of 84 though the street is somewhere in the high 70s. Then at 10:00 am, we get the Petroleum Status report from the Energy Information Administration. The markets will take their cue from the differences in the two reports.

The other question people are asking is if demand is so bad, why is Saudi raising their prices to Asia? That’s a very good question. The truth is that demand is going to improve. There’s still a lot of supply risk in Russia, and turmoil should keep the oil market from falling too far. We still have issues in Libya and reports that OPEC spare production capacity is limited. We could see some volatility over the next couple of weeks, and perhaps the downside isn’t quite in yet. We believe the big picture is that this price break should be an opportunity to get locked in. The last time we had a correction this deep was back in November, and we all know how that turned out.