Oil prices tried to stay strong in the face of the market doing a Federal Reserve freak out. Rumors that the Fed today is going to be extremely hawkish, even reports of potentially talking about raising rates before the end of the year, caused a major sell off in a lot of the markets. That wave of pessimism eventually dragged oil down and took the products with it.
Obviously, the fear of a more hawkish Fed and even a delay of interest rates could slow the economy and could slow the demand for oil at the same time. The rate differentials between the US dollar and other commodities could keep oil prices under pressure. It’s a story and they’re sticking to it.
Economic data yesterday though may suggest that the Fed is getting too hawkish and might be premature as consumer confidence is plummeting, falling to a reading of 97 yesterday when the expectations were for it to come in at 104.7. This came as manufacturing data in Chicago took a dive.
After the close it didn’t help that the American Petroleum Institute (API) reported a whopping 4.906-million-barrel increase in crude supplies. While oil products saw a supportive 1.48 million barrel drop in gasoline supplies and an equally supportive 2.187 million barrel drop in distillate supplies. The market was overwhelmed with the size of the crude oil supply increase.
It’s going to be interesting to see if today’s Energy Information Administration (EIA) report confirms the crude oil increase and if they do, what makes up that increase. We’ll look at production and see if it’s a case of reduced refinery runs or more just an aberration.
The concerns about slowing demand or the potential slowing of demand come as OPEC has shown further commitment to reducing global oil supplies. In the latest Reuters survey, they show that oil output from OPEC fell by 100,000 barrels a day in March as exports from Iran, Iraq and Nigeria seem to be signalling better compliance from the countries that have been over producing.
Geopolitical risk factors continue to be at play but the fact that Israel has not invaded Rafah just yet seems to be taking some of that risk premium off the table. The latest news is Hamas is saying that they’re still studying the recent ceasefire offer. Yet Israel has ceasefire or no ceasefire, they’re going to eliminate Hamas. This comes as reports say that the Biden administration is going to welcome in refugees from the Gaza Strip into the United States.
The Biden administration offers new rules that will add to the cost of energy and inflation. My friend Mike “Mish” Shedlock reports that, “New Biden Energy Rules Will Raise the Cost of a New Home by $31,000.” He says that new HUD energy rules will raise the cost of home construction by imposing stricter building codes. Payback time is 90 years. Maybe time to bring back the 100 year mortgage?
Now The United States Department of Energy (DOE) has decided to mandate federal agencies to construct only fossil fuel-free buildings starting 2030. “DOE estimates that over the next 30 years, the new rule will reduce carbon emissions from federal buildings by 2 million metric tons and methane emissions by 16 thousand tons—an amount roughly equivalent to the emissions generated by nearly 310,000 homes in one year, while also reducing infrastructure costs”. The rule, which enforces the 2007 Energy Independence and Security Act, applies to construction projects with start dates that fall in 2025 or later. The rule requires projects breaking ground in 2025–29 to be designed in such a way that fossil fuel energy in each building is 90 percent lower relative to 2003 levels. Projects that begin construction 2030 or later must cut consumption by 100 percent relative to 2003 levels. The sense is that the Biden administration is trying to push through as much crazy stuff regulation as they can because they think they’re going to lose the election.
Bloomberg writes that, “Nations from the Group of Seven have agreed to work to reduce their reliance on “civil nuclear-related goods” from Russia, as major industrialized nations work to reset their energy plans while isolating Moscow. G-7 energy ministers said their countries will engage in a multilateral effort to promote a diversified fuel supply chain free from Russian influence, according to the closing statement from a meeting in the Italian city of Turin. The ministers also committed to promoting fusion as a future energy source alongside regulatory efforts. Germany had previously objected to any reference to nuclear power as part of the group’s initiatives for so-called green transition.
Gold prices also pulled back on the Fed concerns but MarketWatch cited healthy investment from the over the counter market as well as central bank purchases according to a report from the world council that was released on Tuesday. Total first-quarter gold demand, which includes the investment and industrial sectors and central-bank purchases, climbed 3% from the same period a year ago to 1,283.3 metric tons — the strongest first quarter since 2016, according to the World Gold Council report. The total demand figure included 136.4 metric tons in over-the-counter (OTC) purchases, characterized by market participants trading directly with each other, it said. That’s more than triple the year-ago amount of 42.7 metric tons.
Saudi Arabia and Iran met to try to develop a road map for economic cooperation in the public and private sector. Both sides said the talks were constructive in these two adversaries are trying to find a way to work together.
The New York Times reported that, “the Biden administration on Tuesday released rules designed to speed up permits for clean energy while requiring federal agencies to more heavily weigh damaging effects on the climate and on low-income communities before approving projects like highways and oil wells. As part of a deal to raise the country’s debt limit last year, Congress required changes to the National Environmental Policy Act, a 54-year-old bedrock law that requires the government to consider environmental effects and to seek public input before approving any project that necessitates federal permits. That bipartisan debt ceiling legislation included reforms to the environmental law designed to streamline the approval process for major construction projects, such as oil pipelines, highways and power lines for wind- and solar-generated electricity. The rules released Tuesday, by the White House Council on Environmental Quality, are intended to guide federal agencies in putting the reforms in place.
The morning after a big sell off in the oil makes it harder to recover. Margin selling and position adjustment is adding to early morning weakness. Still oil is at a value range and after we get through the EIA and Fed, we should start the trek higher.
Natural gas is trying to find a bottom against incredible odds. Look to buy long dated calls.