The eastern world is exploding, violence flaring, bullets loading, says Phil Flynn of the PRICE Futures Group.
Oil takes a break in the bull market after an onslaught of bearish headlines caused traders to go to the sidelines. There were reports that the EU agreed to delay a ban on Russian coal imports until August, something the market thought would happen right away, after Germany pleaded for more time to look for alternatives. Also, the Fed signaled in the Fed Minutes the potential for a couple of 50-basis-point interest-rate increases.
The International Energy Agency (IEA) confirmed that they would add 60 million barrels of oil to the global oil market, a number that was already leaked a few days ago. The official announcement was just more fodder to try to bring down prices yet Europe’s inaction and their inability to ban Russian coal, oil, and gas is just another indictment of the blunders of their energy policy failures. Now they are giving in to the Biden administration’s pleas to release more oil even though everyone knows it will only have a short-term impact and will make supplies tighter in the future. Releasing oil from the reserve at this point is like bringing out your closer in the second inning. You won’t have enough gas to get through the ninth inning.
Also there was the weekly Energy Information Administration (EIA) petroleum status supply report that showed some data that seemed to suggest that maybe gasoline demand was weakening a bit. Perhaps demand destruction is setting in because of record-high prices. Or perhaps it’s just lousy weather that is keeping people inside their houses instead of driving as spring is having a more difficult time getting sprung.
The EIA reported a bearish 2.42-million-barrel increase in crude oil supply, but keep in mind it took a 3.7 million barrel release from the Strategic Petroleum Reserve (SPR) to get to that number. Even with that release, the 30th in a row, oil supply is 14% below the five-year average for this time of year. Now as we drain our reserves, supplies are at the lowest level since 2002 and when Biden is through with his market manipulation folly, the reserves will be at the lowest levels since the 1980s.
There was a lot of talk of gasoline demand destruction, yet despite that fact, gasoline inventories fell by 2.0 million barrels last week and are about 1% below the five-year average for this time of year. Over the past four weeks, motor gasoline demand based on product supplied averaged 8.7 million barrels a day, down by 0.3% from the same period last year. There is still a distillate supply issue as well. The EIA said that distillate fuel inventories increased by 0.8 million barrels last week and are about 15% below the five-year average for this time of year.
Propane/propylene inventories increased by 0.7 million barrels last week and are about 21% below the five-year average for this time of year. This is a problem for farmers that are already worried about fertilizer prices. With food shortages looming, Biden is talking about putting food—aka ethanol—in the gas tank in another attempt to try to lower gas prices. Is that the right move when poor countries might not have enough food to eat? I am just asking.
Zerohedge reports that America’s largest farmer cooperative sounded the alarm Wednesday about possible disruptions of fertilizer supplies from Russia due to Western sanctions on Moscow. CHS Inc., the largest agricultural cooperative in the US, said in an SEC filing that it’s concerned about obtaining Russian fertilizer because of sanctions making it “more expensive and difficult to do business with Russia.”
CHS warned that sanctions could “cause delays concerning, or prevent, shipments of fertilizer to us, cause inflationary pressures on and impact our ability to purchase fertilizer, disrupt the execution of banking transactions with certain Russian financial institutions, and result in volatility in foreign exchange rates and interest rates, all of which could have a material adverse effect on our business and operations.” The cooperative said it holds no operations in Russia. However, it has $30 million in grain inventories sitting in silos in Ukraine and will have to take an “impairment charge” because of its inability to access those stockpiles.
Natural gas pulled back from its meteoric run after the EU failed to cut off coal imports from Russia. Still, there are upside risks as demand expectations are rising.
The EIA is predicting that ethane will outpace growth in all other US petroleum product consumption through 2023. Ethane is a component of natural gas and is primarily used as the raw material for the production of ethylene for further production of plastics, fruit ripening, and detergent, and many other uses. The EIA says that the consumption of ethane has grown every year since 2010 in the United States, and more ethane is now consumed in the country than either jet fuel or propane. Consumption of ethane, which EIA estimate using product supplied, grew by 50,000 barrels per day (b/d) in 2021, according to data from our March 2022 Petroleum Supply Monthly. They now forecast in our March 2022 Short-Term Energy Outlook (STEO) that by 2023, US consumption of ethane will grow by another 340,000 b/d.
Over the past two years, domestic ethane consumption has increased due to increased ethylene cracking capacity. In contrast, consumption of most other petroleum products has decreased these past two years as a result of less travel during the Covid-19 pandemic.
US ethane consumption grew in 2021 despite the mid-February winter storm on the US Gulf Coast, which took more than one-third of US ethylene cracking capacity offline. Because about 90% of US ethane consumption is concentrated along the Gulf Coast, storm disruptions reduced ethane consumption by 655,000 b/d in February 2021. Despite this drop, the additional capacity from two new ethylene crackers during the second half of 2021 contributed to an overall increase in ethane consumption 2021.
In the United States, cracking ethane has a higher profit margin than cracking naphtha to produce ethylene, a key component needed to produce many resins and plastics. Ethane’s relatively low cost and high ethylene yield have spurred growth in ethane use as an ethylene feedstock in the United States and increasingly, around the world. Although naphtha cracking can yield valuable co-products such as propylene, butadiene, benzene, toluene, and xylene, demand for ethylene has been outpacing demand for those co-products of naphtha cracking.
Thanks to the frackers! Today is a key day for oil. While the bull market will stay intact, there are risks that we could test in the lower nineties towards Bollinger band territory. We like long products short crude spreads. Natural gas, buy breaks. Oil is going up until we get a recession.
Learn more about Phil Flynn by visiting Price Futures Group.
