The Fed minutes freaked out the stock market, but does a more aggressive Fed signal a red-hot economy, and by default, strong oil demand? The answer is yes, exclaims Phil Flynn of the PRICE Futures Group!
Global oil demand is exceeding expectations, even with cases of the Omicron variant sweeping the world. It seems when one pocket of demand slows, there is somewhere else in the world that makes up for it. Oil prices did sell off in sympathy with the stock market, and it didn’t get help from the weekly inventory reports that showed massive builds in gasoline and distillate, but at the end of the day when you parse through all the data and look at the four week moving averages, you realize that we’re going to be facing an extremely tight oil market in the coming months.
This is something we have been talking about for a long time, and that’s why we have been telling people to get hedged all year. We think that we could get another wave higher as we get into the first quarter of the year. On top of that, flare-up violence in Kazakhstan due to rising fuel prices may be a warning sign to other parts of the globe. Europe is facing record-breaking energy prices and global stability concerns could be real as the commodity super-cycle just starts to heat up.
The New York Times reported that, “Paratroopers from a Russia-led military alliance began arriving in Kazakhstan on Thursday to restore order after a night of protests in the Central Asian country turned violent, with the police reporting that dozens of anti-government demonstrators had been killed and hundreds injured. The foreign soldiers were dispatched after the city hall in Almaty, the country’s largest city, was set ablaze, and the airport was overrun by an angry mob. The police opened fire on the demonstrators, some of them armed, but also accused them of killing 13 officers and leaving 353 injured. The reports of deaths could not immediately be independently confirmed. The effort to quell the unrest, described as a temporary peacekeeping mission by the military alliance, will be limited in time and will aim at protecting government buildings and military objects, the group said in a statement.
This is the first time in the history of the alliance, which is Russia’s version of NATO, that its protection clause has been invoked. The statement did not specify how many soldiers would be mobilized, though Armenia, which chairs its rotating presidency, deployed 70 soldiers according to the Times.
Reports overnight show that OPEC oil output put did raise in December, led by Saudi Arabia but fell in Libya and Nigeria. According to the report, OPEC production rose by 70,000 barrels a day to 27.8 million barrels a day. While the increase was nice, they are still far short of their quota.
A lot of people laughed off the commodity super-cycle last year when we got a slight correction on prices, but I think it’s becoming more apparent when you look at the global supply chain and you look at what’s happening as far as underinvestment in oil and gas. People start to realize that the market’s going to be undersupplied.
For energy, one of the major driving factors for inflation, the problem became with policy. The rush to alternative energies, the demonization of investment and fossil fuels have all conspired to create a situation where the supply response to rising demand has fallen far behind the curve. The Federal Reserve knows about falling behind the curve. That is why people think that the Fed minutes raises the possibility of reducing the balance sheet a lot quicker than people thought and fear that if inflation doesn’t cool off, we could see interest rates rise, potentially, five times this year. At least that’s what some people are expecting. And while a more aggressive Fed could see a stronger dollar and some slowdown in investment, it won’t be an oil bull market killer. The Fed won’t be producing any more oil and that’s the key. Even with the Fed becoming more aggressive, the demand for oil will stay strong and more than likely will exceed supply. The Fed can’t print barrels of oil.
In a higher interest rate environment, a move of some of your money from growth stocks back into energy stocks—old-fashioned oil and gas stocks like big Exxon Mobil (XOM), ConocoPhillips (COP), Shell (RDS.A), Halliburton (HAL), and basic commodity stocks are going to be the place to be in this new year.
As we have said before, we never expected oil would hit $100 in 2021, and believe it or not, even though we have been one of the most consistent oil bulls in the market for the last couple of years, we think it is unlikely that we hit $100 a barrel in 2022 unless there is some type of a major event. We do think we could see oil get near $95 a barrel in 2022. One of the reasons why we don’t see $100 a barrel this year is that higher prices and a more aggressive Fed could curtail demand just a little bit and that should keep prices somewhat under control.
Last year, we were one of the few to predict the coming surge in gasoline prices. Not only did we expect the gasoline prices to rise because of the re-opening of the economy and reduced refining capacity but we understand the nuances that the Biden energy policy would have on the price of gasoline at the pump. Drilling moratoriums and canceling the Keystone Pipeline sent a signal to investors that their money was not welcome in the energy space. Oil producers made decisions based on fear of what more regulations the Biden administration might impose.
The Biden administration says that drilling permits increased under their administration. The reality is that most of those permits were secured because they knew that Biden would soon be cutting them off. There was a rush to get permits before it was too late. So, the buyers who secured these permits did so to get in before it was too late not because of well-thought-out business reasons. They were afraid the government was going clamp down. That is not the most efficient way for these companies to get permits. It was s an act of desperation to stay ahead of potential government shutdowns.
Biden’s attempts to bring down gasoline prices with a release from the strategic petroleum reserve backfired. Most of that oil went to places like South Korea and China and did little to help US refiners produce more gasoline. Prices at the pump did come down but mainly on Omicron variant fears. We saw a big drop in gasoline demand in last week’s report from the Energy Information Administration but that is questionable because last week we saw a big surge. A lot of those numbers on gasoline are being discounted because they were more than likely year-end adjustments, and we believe that gasoline demand is going to continue to exceed expectations.
Biden’s rejoining of the Paris climate accord was also a signal to US energy investors to stay away. His love for electric cars doesn’t match reality. The environmental impact of electric cars with batteries has not been fully thought out by this administration and the reliability of electric cars especially in light of what happened in Washington DC and Virginia with the snowstorm and the traffic jams, have not been taken into account by this administration.
Mass electrification of the auto fleet is not ready for prime time. Everybody knows that electric cars are going to be a big part of the equation, but they have their problems. The range on these vehicles is not conducive to economic growth. When you replace an efficient engine with an inefficient engine you replace efficiency in the economy with inefficiency. That might be OK if you saw huge economic benefits from switching from gasoline cars to electric but it’s very questionable and it’s true whether or not moving the country to all electric is going to have the benefits for the environment the Biden administration hopes. It’s been very well documented that you would have to drive an electric car almost 120,000 miles just to get a break even on greenhouse gas emissions. The negative impacts of strip mining to get the materials needed to build all these electric cars has to be considered and then what to do with these toxic electric battery batteries when they go bad. There are lots of problems to contend with.
The EIA reported that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.1 million barrels from the previous week. At 417.9 million barrels, US crude oil inventories increased by 10.1 million barrels last week and are about 4% below the five-year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 4.4 million barrels last week and are about 16% below the five-year average for this time of year. Propane/propylene inventories decreased by 0.7 million barrels last week and are about 7% below the five-year average for this time of year. Total commercial petroleum inventories increased by 10.2 million barrels last week.
Learn more about Phil Flynn by visiting Price Futures Group.