The Energy Report: Gales Of November

The gales of November came early this year as the petroleum oil market sank with no regard to near-record-low supplies. Normally we get these crazy oil sell-offs right around or on the Thanksgiving Holiday, but this year the market looked like it feasted early on too much turkey and had a tryptophan-induced market crash. It’s probably a good thing that diesel supplies are at a 70-year low and global oil inventories are at the lowest level since 2004 because then oil might have gone to negative $50 again!

How much of this sell-off is real and how much of it is built on perception? What we know is real is that inventories are near historic lows. We know that U.S. oil production may falter because of a lack of investment and a drop in the number of drilled but uncompleted wells. The market can fear demand destruction in the future and while demand numbers continue to disappoint by some measures, the reality is that the supply side of the market suggests that if demand does come back, we won’t be able to meet it with supply.

Yet, recession fears are real. With the Federal Reserve totally fixated on whipping inflation, even if it drives the economy into a recession or worse, it is causing petroleum liquidation, not so much on where we’re at right now but on where we may be in the very near future. The oil market did not like it when San Francisco Federal Reserve President Mary Daly told the world that the Fed pausing interest rate hikes if off the table. She said that she believed interest rates should be 4.75 to 5.25% to be appropriate. Look to old people like me who remember that 5.25% interest rates are still relatively cheap in the whole scheme of things, yet the oil market took that as a sign that the Fed wants to generate a deep recession.

It is not a secret. Most oil analysts know that the only way we have a chance to meet demand this winter is if winter is mild or if we have a severe economic slowdown. You can absolutely be right about the prediction that supplies are going to get to dangerously low levels but it won’t matter if the demand for oil just stops.

Reports say that freight rates have plunged by as much as 90% in the last year from the unprecedented highs they enjoyed during the pandemic. They are expected to stabilize in the short term. New ships are coming online as well keeping rates low but also raising concerns about global demand for products.

We also saw a big drop in the Philly Fed hitting the lowest level since May of 2002 stirring up recession fears. RT reported that the Philly Fed said its diffusion index for current activity tumbled to a negative 19.4 in November from a negative 8.7 in October, with a negative reading indicating a contraction in regional manufacturing activity. The decrease in the Philly Fed index came as a surprise to economists, who had expected the index to inch up to a negative 6.2.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Yet, the reality is that even though the charts look terrible and there’s probably going to be more weakness in the short term, the reality is that the market is probably overplaying its hand to the downside. At some point, we think we are going to see a major turnaround and have a chance to make new price highs this winter.

In the short term, the market can forget the fact that there is no spare oil production capacity in the world. It can forget that when the Chinese economy starts to reopen the market is going to be tighter than perhaps it’s ever been in the history of the global energy markets.

The oil market can ignore the fact that the geopolitical risk to supply is high with Iranian drone attacks on Israeli tankers as well as an oil embargo that’s set to go into effect next month on the Russian oil supply.

The market can ignore the fact that a price caps scheme that Europe has in mind will probably cause a shortage of oil supply. But only for so long. So, what I am saying is that when this correction is over it should be a screaming buy. This should be a time to buy bullish options. Yet, be careful about buying too early because in oil its said, they never give up their dead when the gales of November come early.

Natural gas got a lift on November gales coming early. Winter along with a bullish EIA storage report had them forget about the drama surrounding the restart plans or lack thereof at the Freeport LNG terminal. EIA reported that, “Working gas in storage was 3,644 Bcf as of Friday, Nov. 11, according to EIA estimates. This represents a net increase of 64 Bcf from the previous week. Stocks were 4 Bcf higher than last year at this time and 7 Bcf below the five-year average of 3,651 Bcf. At 3,644 Bcf, the total working gas is within the five-year historical range."

Written By: Phil Flynn