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Punching Bowl. The Energy Report
By: Phil Flynn | May 30, 2024

Take away the punch bowl just as the party is getting started! Fed Officials did not like the Memorial Day price explosion in the commodity complex and did their best to cool off expectations by threatening an interest rate hike to spoil the party. Minneapolis Fed President Neel Kashkari put it best when he said yesterday that, ”Interest-rate hikes aren’t out of the question” and added “If we get surprised by the data, then we would do what we need to do” like whatever it takes, I guess. We know that Neel and his colleagues continually get surprised by data quite often, so the markets retreated.

Even oil, after what most would say was somewhat bullish data from the American Petroleum Institute, seems to have lost the demand driven momentum that started this new week. The API seemed to make up for lost time with a whopping 6.490-million-barrel crude oil draw that was led by a long-awaited 1.706 million barrel drop from the Cushing OK delivery point. That came on the backs of reports of record demand for air travel as TSA reported an all-time high number of passengers at US checkpoints and automobile travel and farmer demand from planting over the weekend. Corn planting that was way behind caught up with 83% planted as of May 26, 2024, just ahead of the 5yr average of 82%.

Surprisingly, we saw a 2.45-million-barrel increase in distillate inventories even with all that demand. That raised some eyebrows about the overall data.

Gasoline inventories came in pretty much in line with expectations, dropping about 452,000 barrels last week.

Now today, because of the holiday, we will see the inventory numbers at 10:00a central time from the Energy Information Administration (EIA). I expect that if the EIA shows similar data. At the end of the day, the markets should shake off their concerns about what the Federal Reserve may or may not do when it comes to interest rates. The reason why I believe that is more than likely is that a large crude drawdown in supply could be the first of many in the coming weeks.

The market will also look at gasoline demand very closely to see if the momentum that we saw in last week’s report continues. Crack spreads have been relatively weak for gasoline.

Oil may also garner some support from OPEC Plus their favorite co-conspirator Russia. The word on the street is at the cartel is debating about prolonging the oil supply cuts amid rising global oil inventories. It seems like the cartel is concerned that we saw some crude builds here in the United States which was a bit of a surprise. Also, there is more talk about commitment by OPEC cheaters to offer compensation cuts for their overproduction. Saudi Arabia is leading the cartel and is continuing to curtail their oil production. JODI said that Saudi Arabia’s crude production fell by 38 kb/d in March to 8.97 mb/d while its crude exports rose by 96 kb/d to 6.41 mb/d.

Geopolitical risk factors for oil continue to simmer in the background. Another disturbing story about the possibility of escalation in the Russia Ukraine conflict is making many people cringe, raising the possibility that the US could be drawn into a more active role in the conflict. Not only did the Biden administration consider sending U.S. military advisers to train Ukrainian troops in Ukraine, not dissimilar to how we sent advisers to Viet Nam. Now there’s reports that US Secretary of State Anthony Blinken suggested that the US might allow Ukraine to use American made weapons for strikes inside of Russia. That would be a dangerous policy shift and would raise the stakes and the possibility of the war growing beyond the current battlegrounds. It also increases that the odds that the college students protesting against Israel might have to change to protesting stopping the draft because that could be next if things keep going the way they’re going with this administration.

Now don’t tell Joe Biden the fossil fuels may be with us a lot longer than people think. It might make him start screaming again. Yet in the energy space guys like Warren Buffett are really betting on long term oil which place like Occidental, and we continue to see mega deals in the energy space. The Wall Street Journal reports that, “ConocoPhillips COP -3.12%decrease; red down pointing triangle has agreed to acquire Marathon Oil MRO 8.43%increase; green up pointing triangle in an all-stock deal valued at $17.1 billion in a bid to catch up with rivals as drillers race to secure new oil and gas wells. Under the terms of the agreement, Marathon Oil stockholders will exchange each share for 0.255 shares of ConocoPhillips, representing a nearly 15% premium based on Marathon Oil’s closing share price on Tuesday. The deal allows ConocoPhillips to expand its presence in several key U.S. shale basins including in Texas and North Dakota.

For the entire oil complex, we are looking to see demand numbers start to turn up. The reason why the market is conflicted and caught in a trading range is because they are not sure that they should focus on current fundamentals or what may happen with demand if the Fed decides to increase interest rates. From my perspective I think it’s unlikely that the Federal Reserve will be able to raise interest rates especially with an election ahead. The flipping back and forth on rate expectations is keeping the oil market subdued.

If demand starts to perk up in the US, China and India, which it looks like it’s going to do, then I think that we are very close to the bottom. Reuters is reporting that, “Asia’s imports of crude oil rose to the highest in 12 months in May, with the strength being driven by India as the region’s second-biggest buyer is on track to see record arrivals. The world’s top crude importing region is expected to have arrivals of 27.81 million barrels per day (bpd), up from 26.89 million bpd in April, according to data compiled by LSEG Oil Research. That’s an increase of 920,000 bpd month-on-month, with the bulk of the gain being accounted for by India, where imports are expected to rise to an all-time high of 5.26 million bpd, up 710,000 bpd from April’s 4.55 million bpd.

The other deal with traders is keeping an eye on is Saudi Arabia’s further listing of shares to own a part of Saudi Aramco. Rumors have the listing at the value of the listing is estimated to be around $10-$11 billion.

Amena Bakr is reporting that the announcement for the Aramco listing is likely to happen today after the market closes- sources familiar with the matter are telling her.

Once again hedgers probably should use this dip to put on some longer-term positions, we really expect to see a big surge in prices at some point later in the year.

Natural gas prices pulled back after the incredible comeback. The key today will be the report that will be released on time at 9:30 central Standard Time. Reuters is reporting that US utilities added a smaller than usual 78 billion cubic feet of natural gas and this storage last week as low prices earlier this year controllers to cut output. The 78 billion cubic feet injection compares with an injection of 106 BCF during the same week a year ago and average of 104 BCF in recent weeks the market has been surprised by this number and has been a catalyst for the market to move higher if once again this number comes out on the bullish side of the equation, we would expect natural gas to make new highs for the move.

Long term the demand outlook for natural gas looks strong from the liquified natural gas front as well as power generation. In the United States we still must keep in mind that we’re heading into hurricane season and that could impact natural gas demand either positively or negatively, depending on when and if these storms hit and where they hit.

Gas output in the Lower 48 U.S. states fell to an average of 97.7 billion cubic feet per day (bcfd) so far in May, down from 98.2 bcfd in April, according to financial firm LSEG. That compares with a monthly record of 105.5 bcfd in December 2023. There were 63 total degree days (TDDs) last week compared with a 30-year normal of 63 for the period, according to data from financial firm LSEG. TDDs measure the number of degrees a day’s average temperature is above or below 65 degrees Fahrenheit (18 degrees Celsius) to estimate demand to cool or heat homes and businesses.

Food inflation has been a big issue and cattle prices are probably going to continue to break record highs. Yet cattle fell on a report that China was blocking US beef shipments from the JPS meat plant in Greeley Co. The reason why is China blocked the beef shipments because they identified traces of a feed additive called Ractopamine which has been approved for use in the United States but not in China or in the European Union for that matter.

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