The Energy Report: Demand Fears Are Back

Oil prices are plummeting as oil demand fear starts to rear its ugly head. Not only do you have some speakers from the Federal Reserve that may want to throw cold water on the recent stock market rally, there is also China taking significant steps in reaction to a slowing economy and lower oil demand.

China overnight cut their fuel prices effective Wednesday for diesel and gasoline. This could be a sign that they need to stimulate the economy and another sign that perhaps their oil demand is faltering.

The Chinese commerce ministry said that they’ve issued new rules to strengthen the import management of crude oil, iron ore, copper concentrate and potash. This report caused the oil market and other commodities to sell off overnight.

Yet despite these seemly desperate measures by China, OPEC is still bullish on demand and still bullish on China. OPEC Secretary General Haitham Al Ghais this morning said that despite China’s actions, he expects global oil demand will grow next year by 2 million barrels of oil a day. He seems to dismiss China’s oil demand fears by saying that, “China’s economy is still growing at a rate of 4.5 to 5% which is slower than we are accustomed to but still very strong.” He also says that OPEC has taken a proactive and preemptive approach to attain a stable market through the last year. He said that OPEC has done what it could to continue to make sure that investments are made in fossil fuels.

The dollar also has rebounded ahead of talk from Fed Chair Jerome Powell and voting members such as New York Fed chief John Williams and Dallas Fed President Lorie Logan this week. We also got a warning from Geoff Gottlieb the International Monetary Fund’s Senior Regional Representative for the Office for Central, Eastern, and Southeastern Europe who warned that, “macroeconomics policies mustn’t be loosened prematurely or too rapidly”.

Add to that there is the unwinding of the war premium. Oil prices shot up pricing in the worst-case scenario for a potential disruption in supplies. Now because that hasn’t happened the market is overreacting to the downside as it removes all war premiums. There was a growing sense that the war between Israel and Hamas may be contained and may not impact global oil flows. Yet we know this war is far from over. The risk to supply is still very real. And now because you put war premium in and take it out, the price of oil can get disconnected from real supply and demand.

Not only is there the ongoing war between Russia and Ukraine but the war between Israel and Hamas could very easily spread. The Wall Street Journal also just announced that the US and NATO suspended involvement in its landmark Cold War arms treaty with Russia. So there’s no doubt that the world is still a very dangerous place.

At the same time, there should be growing pressure to crack down on Iran. Iran continues to fund terror operations. They are one of the biggest state sponsors of terrorist organizations. At some point, a crackdown on Iran must happen. Oh, and you can forget about the JCPOA nuclear deal. That will go down in history as one of the biggest blunders that enriched the Iranian regime and caused instability in the world. This allowed Iran to continue to fund terror. Those who enabled Iran should be held accountable.

And while demand in China is questionable the country continues to import and refine near-record amounts of oil. The growth isn’t as strong as people had thought but still, they’re using a significant amount of oil in the US. We’re going to see supplies of oil and gas tighten.

Gasoline demand is expected to snap back, and the Energy Information Administration is pausing to fix its data. The Energy Information Administration has been getting a lot of criticism in recent years for major oil price adjustments by underreporting demand and overestimating supply. Because of that, they are taking the week off to try to fix some of those problems.

Another big blunder by the Biden administration was prematurely releasing oil from the Strategic Petroleum Reserve. Now it appears that the US is going to be in a hot competition to buy oil back for its reserve with Europe and China. Yesterday, the US Energy Department announced a supplemental solicitation for up to 3 million barrels of oil for delivery in January 2024. This comes as Bloomberg reports, “A record amount of oil tankers is coming to the United States to buy United States oil. That sounds like a good idea but the price of oil, despite the recent price drop, is still above their preferred buying price of $70 a barrel. Besides, they are not the only game in town as the demand for US oil is hot.

Bloomberg reports that, “A record number of supertankers is steaming toward the US to load oil as shipowners look to capitalize on an increase in the nation’s crude exports. Forty-eight vessels are bound for the country in the coming three months, according to data gathered Friday by Bloomberg. That’s the most in at least six years. The flow of vessels illustrates the changing energy landscape as the US pumps cruder than ever before and the Organization of Petroleum Exporting Countries and its allies seek to prop up the market with supply curbs. US crude exports have surged this year, government data show.”

 

Natural gas tanked as weather forecasts changed back to unseasonably warm. This comes as the Energy Information Administration reports that, “Growing U.S. oil production increased natural gas production by 9% in 2022. They point out that major crude oil-producing regions include the Permian, Bakken, Eagle Ford, Niobrara, and Anadarko regions, which make up almost all U.S.-associated natural gas production.

They say that increasing crude oil production in the Permian region, which spans parts of western Texas and southeastern New Mexico, is driving the growth in associated natural gas production. Currently, more oil is produced in the Permian region, the largest of the five major U.S. crude oil-producing regions, than in the other four regions combined. In 2022, production of crude oil increased in the Permian region by 12%. Associated natural gas production increased by 15% in the Permian region to an average of 10.2 Bcf/d for the year, and it accounted for 56% of all U.S.-associated natural gas production. In recent years, new pipeline takeaway capacity additions have facilitated associated natural gas production growth.


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