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Sticky. The Energy Report
By: Phil Flynn | February 15, 2023

Oil and inflation are sticky. Oil prices are trying to stabilize even after inflation data came in hotter than expected at a 6.4% increase in year-over-year inflation and a massive 10.5-million-barrel crude oil supply increase was reported by the American Petroleum Institute (API). Oil prices weakened after the inflation data. The dollar increased as hopes that we may see the Fed back off interest rate increases diminished. With inflation as sticky as oil, it is harder to believe that the Fed will relent on trying to slow the economy more in the coming months. Yet while the world seems like it is awash in oil right now with the big supply increase and Biden front loading barrels from the SPR, there are signs that the market is heading toward much tighter supplies ahead.

The International Energy Agency, (IEA) perhaps the most famous for un-reporting demand, is now raining on their oil demand forecast yet again. I will give you a moment for the shock to wear off. The IEA now says that world oil demand will rise by 2.32 million bpd in 2023, up 100,000 bpd from the previous forecast. As I said before, the IEA is most famous for is underreporting demand. Yet the IEA director Dr. Fatih Birol is also famous for saying that the world needs to stop investing in fossil fuels. He and his agency in May of 2021 said to achieve the net-zero target requires an “unprecedented transformation of how energy is produced, transported and used globally. In addition, from now on there should be “no investment in new fossil fuel supply projects and no further final investment decisions for new unabated coal plants.” Yet despite that not happening, Dr. Birol still says that reaching net zero targets is possible. How! I don’t know but they still say the sky is falling. Or maybe it is just China balloons.

The IEA also says that oil supplies will exceed demand in the first half of the year but the second half could be a deficit. Maybe Biden should have waited before he released those barrels from the SPR.

The API also reported that the gasoline supply increased by just 846,000 barrels. Those supplies should be rising more at this time of year. Gasoline demand is strong and that may become a problem later on as we start to make the switch to the summer blends. Distillate inventories did increase by 1.728 million barrels but are still way below average for this time of year.

OPEC yesterday said that China’s oil demand may increase by 590,000 bpd in 2023 after a contraction in 2022. They say they are concerned over the extent of China’s economic recovery and its oil demand impact. Yet at the same time, they lowered the OPEC oil supply growth forecast to 1.4 mln bpd (from +1.5 mbpd) citing lower expectations from Russia, US.

Lower supply growth from the US is in part due to the US meddling in the markets with unprecedented moves of oil releases and the most uncertain regulatory environment in history. Biden’s wild and baseless accusations of price gouging and war profiteering against the oil and gas industry have created a hostile environment for investment.

OPEC production is down. Non-OPEC production is down. Russian oil production is down. Demand is going to rise, what more do we need to know? Well, we must know whether China’s reopening is going to continue to increase oil demand. At this point, I don’t get why people don’t see that’s going to have a major impact on demand. I think people are underestimating the demand break from China and we’re going to find out very shortly. The other concern is whether the Fed forces us into a deep recession. I do not see that. Use weakness to get long and put on bullish options strategies.

Natural gas is still trying to bottom. EBW Analytics says that, “Natural gas again tested—and held—technical support Monday, laying the groundwork for prices to probe higher. Freeport LNG requested FERC authorization to restore operations to all three LNG trains and weather is turning steadily less bearish into late February—enabling recent gains. Storage surpluses are set to rocket higher in coming weeks to multi-year highs While partially priced-in, it may prove difficult for NYMEX futures to post a sizable rally in the face of continued oversupply conditions. Weather models are indicating risks for a possible polar vortex dislocation that could bring market-altering cold to the US into mid-March. Still, price-elastic gas-to-coal switching could help the market absorb bullish weather shifts. Within the next 30-45 days, it remains likely that Freeport’s return, more supportive weather, decelerating supply, and steadying storage surpluses could help NYMEX futures establish a bottom and migrate higher.

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