Fears that the euro, as it grows close to parity with the U.S. dollar, will force Europe to raise rates aggressively against the backdrop of what the International Energy Agency calls the worst energy crisis ever, caused a massive sell-off in oil. Fears of future oil demand destruction is overtaking the realities of the moment. Yes, there are fears that China will do more COVID shutdowns but for now, the futures markets have lost touch with the physical market that reportedly is not reflecting the fact that barrels of oil are difficult to find even at a premium to the current futures price.
Javier Blass at Bloomberg pointed out that while the, “ICE Brent futures nosedive below $100 a barrel. And at the very same time, a physical oil trader bid this afternoon +$5.85 over Dated Brent for Forties crude (the strongest premia in at least 14 years). It found no sellers!!!” So if the physical market is so tight, then why are prices cratering other than technical reasons and partly because hedge funds and banks and traders have abandoned the futures side of the market?
Ole S. Hansen, head of commodity strategy at Saxo Bank, pointed out that open interest across the five major crude oil and product futures has fallen to a 7.5-year low as high volatility (high uncertainty) forces traders to run lower exposure. He also pointed out that the recent weakness has not seen long liquidation being exchanged with new short positions.
The funny thing is that if you look at the oil curve, even with the massive selloff, it is still in steep backwardation. That still signals a very tight market. On top of that, if you were to believe the OPEC demand forecast that predicts global oil demand to reach a record 102.99 million b/d in 2023, you might ask where all of that extra oil is going to come from.
U.S. President Joe Biden hopes it comes from OPEC. He is on his trip to the Middle East, which will include begging Saudi Crown Prince bin-Salman for some extra barrels. The question is whether OPEC can raise output while the U.S. continues to restrict drilling and puts on a drilling moratorium and take offshore parcels out of the production realm. National Security Advisor Jake Sullivan said in a press conference on Monday: “We do believe there is a capacity for further steps that could be taken. It’s ultimately up to OPEC countries to determine what those additional steps entail, he said. No word on whether he asked U.S. oil and gas producers what steps they can take to raise output.
The American Petroleum Institute (API) report did not provide any real support. API reported crude +4.762M, gasoline +2.927M, distillate +3.262M, Cushing +0.298M. The market will compare the Energy Information in ministration data later, but we don’t expect it to be too much different. Traders will focus on the demand side of the equation, which last week was pretty good. Total product demand was over 20 million barrels a day. Exports will also be watched closely. We do know that we saw the release of 6.9 million barrels from the strategic reserve and we also know that we would have seen a draw and that did not happen.
Right now we have to decide what is real and what is imagined. We do know that whales are in the process of adjusting for lower demand based on signs of demand destruction for diesel globally and gasoline demand that has seen its growth slowed due to high prices. Yet, at the same time even with that slowdown in demand, in every major category for petroleum, we are below average for supply. The other issue is, normally we see a dip in prices usually early July only for the market to rebound back in August. We think that hedgers should use this sell-off as an opportunity to lock in some long-term prices and still believe that there is upside risk to prices going forward. We do know that Russian oil is getting out to places like China and India and Brazil. At the same time, we think the risk that Russia will cut off gas supplies to Europe is going to keep the diesel market very well supported. We do not expect much out of Biden’s meeting with Saudi Arabia. They may signal to the market that they may add a few more barrels, yet, at the end of the day, the big question is how many barrels can they add?
Natural gas had a wild day. Hot temperatures across the U.S. are going to keep the market in a breakout mode to the upside. We’ll see some high volatility, but the market is looking very solid. Production numbers on {{0|natural gas are disappointing. This might be a good opportunity to put on your winter hedges for natural gas.