The Energy Report: Respite


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Oil prices took a respite from worrying about the global undersupply of oil and instead began to focus on the parabolic dollar and more predictions of impending economic gloom.

The dollar went up like a rocket after the US government avoided a shutdown and at least one Fed official, Patrick T. Harker, had to take elevated oil prices into account when it came to raising interest rates. It’s too bad that the Fed can’t produce oil because the only other way they have to bring down prices is to crush the economy. The Fed’s Loretta Mester said one more hike is probably needed this year before it stands pat for some time. Federal Reserve Chairman Jerome Powell also said that the Fed will keep rates higher until inflation is down to its target.

This comes as OPEC Secretary-General Haitham Al-Ghais is warning anyone who will listen that the world needs at least $12 trillion to be invested in oil and gas production by 2045 and if we do not, “we are actually endangering energy security.”

Yet other analysts are predicting a potential oversupply that may come down to the future of the Chinese economy. There has been a lot of concern about Chinese oil demand. Still, despite some doom and gloom predictions, Chinese oil demand has stayed close to records.

Many still believe that moving forward China’s demand could be the make-or-break point for oil.  Goldman Sachs reports that China’s demand for many major commodities has been growing at “robust rates”. They say that China’s demand for copper has risen 8% year on year, while appetite for iron ore and oil are up by 7% and 6% respectively, all beating Goldman’s full-year expectations.

Noted oil bear Ed Morse of Citi Group told Bloomberg that he is betting, “The oil market will move between supply shortages and oversupply, said Morse. But ‘oversupply’ won’t be big enough to get us down to $20, or let alone negative prices, and the undersupply won’t be big enough to get us over $100, but it will mean volatility in the oil market.”

The author of the book “The Prize” Daniel Yergin says the market is not talking about the incredible rise in non-OPEC production, especially in the US and Canada. That could be because some are predicting that oil production in the US might level out due to falling rig counts and the plunging rates of drilled but uncompleted wells.

Still, Bloomberg reported that “U.S. crude oil production reached the second-highest level on record in July as output from Texas’s Permian basin soared to an all-time high.”

Now before California Gavin Newsome tries to take credit for it, let’s point out that most of the Permian Basin is on private, not Federal land. Bloomberg wrote, “The nation’s production rose to 12.991 MMbpd, the highest since a peak of 13 MMbpd in November 2019, according to data from the Energy Information Administration. Most of the gain came from Texas, where oil drillers produced a record 5.63 MMbpd.” Go Texas! Bloomberg points out, “The output growth comes even as operators dial back activity.

Now back to the supply-side realities. It is very likely that we will get another draw in the Cushing, Oklahoma delivery point. We expect to see draws across the board.

Part of that is continued record oil product exports.

The Energy Information Administration (EIA) reports that U.S. petroleum product exports totaled nearly 6.0 million barrels per day (b/d) in the first half of 2023, 2% more than during the same period in 2022. The first half of 2023 saw the most U.S. petroleum product exports during the first six months of any year in our Petroleum Supply Monthly data, which date back to 1981.

Product exports grew more slowly in the first half of 2023 than in the first half of 2022, when they quickly rose to meet increased demand in Europe after the region took measures to reduce petroleum product imports from Russia.

Oil retreat from the key monthly resistance of $95 means that the buying frenzy has eased. While the market is soft, we think that the big-picture downside is limited. Search for option play bargains.

Oil also saw some pressure from the reports that Turkey’s energy minister said the country will restart operations this week on a pipeline from Iraq that has been suspended for about six months.

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