Oil & Gas - Energy - Commodities - Resources (OILBRENT)

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Demand Drag. The Energy Report
By: Phil Flynn | May 31, 2024

Oil prices had a terrible month in May as demand concerns continue to plague the market as we head into a new era of uncertainty. On one side, we had disappointing numbers come out on diesel and gasoline demand and weak manufacturing in China. On the other side were geopolitical risks that are rising as we have the Biden administration ramping up the possibility of a major escalation in the Russian Ukraine war. The political show trial in New York City against Donald Trump is also raising concerns about the integrity of the US justice system and the future of the United States.

People of reason and intellect realize that what happened in New York City is a very dark day in the history of the United States. When people like prosecutors and judges use the US justice system to abuse their power and trample on constitutional right of a person to get a fair trial in the name of furthering their own leftist political agenda, we have entered a most dangerous time in the history of our fragile republic. Judges willing to soil their own dignity and reputations and be bought and insult the offices that they are supposed to represent, one can only pray that people of virtue speak up and act. Pray for our country.

While the press is so focused on this show trial in New York, the possibility of the US being drawn into Russia Ukraine war is more likely every day under the leadership of Joe Biden. The Wall Street Journal reported that ‘in a significant policy reversal, the Biden administration on Thursday said for the first time that it would allow Ukrainian forces to do limited targeting with American-supplied weapons inside Russia.

The new policy will allow Ukrainian forces to use artillery and fire short-range rockets from Himars launchers against command posts, arms depots and other assets on Russian territory that are being used by Russian forces to carry out its attack on Kharkiv in northeastern Ukraine. But the policy doesn’t give Ukraine permission to use longer-range ATACMS surface-to-surface missiles inside Russia.

We are also seeing a demand disconnect from what we have heard from AAA and the talk of record-breaking TSA numbers and the EIA data and from the jump in consumer confidence data.

Despite US refinery runs hitting a 4-year high, the demand for gasoline and diesel was disappointing. The Energy Information Administration (EIA) reported a surprising drop in both gasoline and diesel demand reflecting not consumer confidence, but consumers getting hit by Biden’s inflationary policies. The EIA said gasoline fell by 166,000 barrels a day down from 9.315 million barrels a day versus last week’s report of 9.148 million barrels. Distillate fell from 3.883 million barrels a day in last week’s report to 3.795 this week’s report.

Yet despite plunging crack spreads refiners were born to run. The EIA put U.S. crude oil refinery inputs averaged 17.1 million barrels per day during the week ending May 24, 2024, which was 601 thousand barrels per day more than the previous week’s average. Refineries operated at 94.3% of their operable capacity last week. Gasoline production decreased last week, averaging 10.0 million barrels per day. Distillate fuel production decreased last week, averaging 5.0 million barrels per day.

The supply side was also mixed with the bigger than expected drawdown in crude oil inventories but bigger than expected increases in gasoline and diesel. The EIA said that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.2 million barrels from the previous week. At 454.7 million barrels, U.S. crude oil inventories are about 4% below the five year average for this time of year.

Total motor gasoline inventories increased by 2.0 million barrels from last week and are about 1% below the five-year average for this time of year.

Both finished gasoline and blending components inventories increased last week.

Distillate fuel inventories increased by 2.5 million barrels last week and are about 6% below the five-year average for this time of year.

Propane/propylene inventories increased by 2.1 million barrels from last week and are 15% above the five-year average for this time of year. Total commercial petroleum inventories increased by 12.7 million barrels last.

Reuters report that, “Analysts have lowered their 2024 oil price forecast for the first time since February, reflecting lower risks to supply from ongoing wars in the Middle East and Ukraine, a Reuters poll showed on Friday, as markets gear up for a meeting of OPEC and its allies this weekend.

A poll of 41 analysts and economists surveyed by Reuters in the last two weeks saw Brent crude LCOc1 averaging $84.01 per barrel in 2024 with U.S. crude CLc1 at $79.56 – down from April forecasts of $84.62 and $80.46, respectively.

We think oil prices are oversold at this point and the crack spreads should start to turn just a bit unless the economy really takes a turn for the worse. We’re definitely seeing signs of stress in the economy but that could also mean the Federal Reserve will be able to follow through on their desire to cut interest rates. Fed speakers continue to play good cop/bad cop when it comes to interest rate expectations and today’s CE inflation may be more telling than anything you hear out of a fed official. They may try to shock and awe us with their meeting officially on Sunday. That could lead to a very interesting opening Monday evening. Reports that China is still ramping up refinery activity despite the slowdown is suggesting that we will see China’s demands start to perk back up.

Natural gas pulled back after a bearish weekly inventory report, but the outlook long term continues to brighten. The bigger than expected increase in inventories could have been due to storms creating power outages in places like Texas and other southern states. The EIA working gas in storage was 2,795 Bcf as of Friday, May 24, 2024, according to EIA estimates. This represents a net increase of 84 Bcf from the previous week. Stocks were 380 Bcf higher than last year at this time and 586 Bcf above the five-year average of 2,209 Bcf. At 2,795 Bcf, total working gas is above the five-year historical range.

The EIA though reported that U.S. summer natural gas consumption forecast for electric power matches 2023 record. The EIA forecasts that the natural gas consumed for electricity generation this summer in the United States will reach near the record set last year. EIA says that despite a 3% increase in overall U.S. electricity generation this summer, we do not expect natural gas consumption for electricity generation to grow. Growth in electricity generation will be largely driven by increased renewable energy production. In our May 2024 Short-Term Energy Outlook (STEO), we forecast natural gas consumed to generate electricity will average 44.7 billion cubic feet per day (Bcf/d) in the United States during the peak summer months of June through August, matching the record high set in the summer of 2023.

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