Greenflation is raising fears about a deep recession causing havoc in the petroleum markets that are getting mixed signals surrounding demand and the depth of the coming recession. What is Greenflation? It is inflation that has largely been caused by the green energy movement to demonize fossil fuels and fossil fuel producers.
Global markets have to digest a devastating Consumer Price Index that posted a 9.1% in June from a year ago, and up by 1.3% since May. That was the biggest jump in inflation since 1981. Mish Shedlock points out that the energy index rose 41.6% over the past 12 months. The gasoline index increased 59.9% over the span, the largest 12-month increase in that index since March 1980.
Oh sure, U.S. president Joe Biden blames Russia's Vladimir Putin’s invasion of Ukraine for inflation, at least this week, but Putin’s war in Ukraine is allowed to continue because Russia’s fossil fuel monopoly in Europe has allowed Putin to spread his errors in Europe. The major factor for inflation other than money printing happens to be the fact that Europe and the United States has clumsily tried to rid themselves of fossil fuels, thereby leaving the world short of supply and causing a situation where the only answer may be to slow down the global economy so supplies can catch up with demand.
Now the Fed must admit that we may have to have a historic interest rate increase to quell the Greenflation pressures. For the oil trade that means that they have to adjust their expectations for future demand. Demand, that if you look at the physical markets, seems insatiable but if you look at the Energy Information Administration data, seemed to crash last week and almost grind to a halt. In just one week the EIA reported that total demand on the US system plunged by a whopping 2.5 million barrels a day. The drop was led by a sharp 1.65-million-barrel-a-day drop in gasoline demand as U.S. drivers parked their cars over the fourth of July holiday weekend or maybe just abandoned them on the road. That was the weakest gasoline demand number for that week in July since 1996. Gasoline supply saw the biggest increase since January, posting a 5.8-million-barrel increase.
Crude supply, enhanced by a whopping 6.8-million-barrel release from the Strategic Petroleum Reserve, increased to 3.3 million barrels, which put supply at the highest level of the year. Yet, at the same time are still 5% below the five-year average. We also saw ULSD stocks increase by 3.4 million barrels this week as demand fell by 230,000 barrels a day.
So is this plunge in demand that we saw week over a week finally a point at which the U.S. consumers have had enough? It is hard to read too much into one week’s data, especially because last week’s data seems to suggest that demand was rather robust. There is no doubt the futures market is selling off on demand concerns even though we’re seeing global market still very tight.
Chevron (NYSE:CVX) CEO Mike Wirth is warning that the selloff in oil may be short lived. In an interview with CNBC, Wirth said that he thought the sell-off in oil was great for the economy and it’s great that prices have moderated, but he also sees risk remains secured to the upside. Wirth says the real challenge for the globe is to invest in supply as we come through whatever form of economic slowdown is ahead. We need to support growth going forward, and that growth, of course, needs to be powered in part by fossil fuels.
Oil prices also saw some weakness and hope that Biden is going to be able to secure a few extra barrels of oil from Saudi Arabia. Most market watchers believe that Saudi Arabia does not have as much spare capacity as the President would like to think they have. The best chance and hope for the world for fossil fuels is U.S. energy producers that Biden continues to snub.
At the same time, Biden is talking tough on Iran, saying that he will use military force to stop Iran from getting a nuclear weapon. This comes as the White House says that Iran is working with Russia to kill Ukrainians and there seems to be new axis of evil in Russia and potentially China working against the Western world to create havoc and dominance over Europe and the world. Maybe his tough talk on Iran is to win the favor of Saudi Crown Prince bin Salman. Biden is all about politics, and the talk is whether or not he will shake the hand of the Saudi Crown Prince. Remember Obama bowed to the Saudi leaders. This is quite a change from those days.
There is no doubt energy prices are going through a sharp adjustment. The question is how deep the recession will be. We agree with Chevron CEO Wirth that the risks are still skewered to the upside. We believe that we’re going through a process right now of adjustment and that supplies will be tight. Even if demand continues to deteriorate, the demand growth numbers by the OPEC cartel are much stronger than those by the International Energy Agency. And, let’s face it, OPEC has a much better track record in predicting demand than the International Energy Agency.
This should be a time to look at bullish options strategies. In the future, it’s a trader’s market. The technical downside could be below 88, but we think if we get a headline, that mood could shift back to the bull side quickly. Javier Blass points out that Brent crude dropped to $97.5 a barrel. If it closes at that level, it would drop to its lowest since Feb 23, a day before the Russian invasion of Ukraine started. No more Putin hike. Now it is all Biden.
We also get the EIA natural gas report. Reuters reported that, “U.S. utilities likely added a larger-than-usual 58 billion cubic feet (bcf) of natural gas to storage in the week to July 8 as the ongoing outage at Freeport LNG’s export plant in Texas left more fuel in the United States, a Reuters poll showed on Wednesday. That compares with a build of 49 bcf during the same week a year ago and a five-year (2017-2021) average injection of 55 bcf.