Oil Prices Are Coming in Like a Lion

Oil prices are coming in like a lion, states Phil Flynn of PRICE Futures Group.

March is here and the Energy Information Administration (EIA) had to admit that US oil demand has been at a four-year high, and Russia is cutting exports of diesel and putting a floor on the price of their oil as fears that maybe sanctions might start to bite. Continuing and expanding backwardation suggests a tight oil market and crack spreads for gas and diesel snapped back after its Monday post (EIA) report plunge a sign that demand in India and perhaps even China is changing the narrative that current supply versus demand did not matter as we were going into a recession. Yet banking concerns could prove to be a headwind for the oil market that looks like it’s leaping toward a global shortage.

As reported by Bloomberg US domestic fuel consumption reached 20.23 million barrels a day last year, the highest level since 2019, according to Energy Information Administration data released Thursday. US demand should continue to strengthen this year to an average of 20.39 million barrels a day, just below 2019 levels, said the agency. Forecasts for oil use are being closely watched by market participants, with global balances teetering into oversupply. Bloomberg says, “The EIA has in recent years come under fire for underestimating US demand in its weekly reports, only to revise them markedly higher in the monthly data. In its Thursday report, the EIA raised its estimated December jet fuel demand by 5%. The agency also revised its figures for year-end gasoline and diesel consumption.

Oil also popped on signs that Russia with cut oil exports if they do not get the price they want as new sanctions are making buyers wary. Bloomberg reports that Moscow has for the first time activated its so-called price floor mechanism to shield the flow of petrodollars to its state budget from Western energy sanctions. Russia, which banned gasoline exports for six months, is now rumored to ban diesel exports which would be a major problem for the globe because the diesel market is way under-supplied. Reuters reported that Russian Deputy Minister Alexander Novak said on Wednesday that Russia is not considering a ban on diesel exports and that a ban on gasoline exports may be lifted at any moment if the market becomes saturated. Yet this morning Reuters is reporting that Russia’s exports of ultra-low-sulfur diesel (ULSD) from the Baltic Sea port of Primorsk are set to fall by 13% month on month to 1.73 million metric tons in March, down from 1.86 million tons scheduled for February, two traders said on Friday.

So that’s why the Biden Administration pushes Russia with new sanctions Russia could cut back creating a global supply deficit by withholding exports that could potentially cause another huge price surge there’s a growing risk of a huge upside move if this happens and hedgers better be prepared just in case.

In the meantime, gasoline demand in the United States continues to be strong refinery outages in Whiting, IN continue to wreak havoc with the supply side and that’s keeping gasoline prices relatively strong, especially across the Midwest. And keeping the national average high, diesel could be a big problem if Russia cuts off exports so stay tuned.

It was reported by India News that India’s demand for jet fuel in February surged past pre-pandemic levels as increased air travel boosted consumption, preliminary data of state-owned firms showed on Friday. Aviation turbine fuel sales by three state-owned fuel retailers soared 7.1 percent to 6,32,600 tonnes in February compared to the year-ago period. This was 55.2 percent higher than the consumption in Covid-marred February 2022 and a shade better than the 6,32,100 tonne demand in February 2020, just before the pandemic set in. Month-on-month jet fuel sales were up 3.5 percent, the data showed.

Yet banking issues could cause a problem for oil bulls. Barrons reported that “A month after shaking the regional bank industry with a surprise provision for loan losses, New York Community Bancorp rattled nerves again by announcing a $2.4 billion December quarter earnings hit. At the same time, it said it identified “material weaknesses” in its loan review process and abruptly changed CEOs.”

In China, consumer demand for energy is rising but manufacturing is still a worry. China’s manufacturing PMI index hit 49.1 for February, down from  49.2 in January but in line with expectations.

Natural gas is trying to bottom but springtime is making it difficult. The EIA said that working gas in storage was 2,374 Bcf as of Friday, February 23, 2024, according to EIA estimates. That represented a bigger-than-expected decrease of 96 Bcf from the previous week. Stocks were 248 Bcf higher than last year at this time and 498 Bcf above the five-year average of 1,876 Bcf. At 2,374 Bcf, the total working gas is above the five-year historical range.

Still the IEA point out that the United States was again the largest supplier of liquefied natural gas (LNG) to Europe (EU-27 and the UK) in 2023, accounting for nearly half of total LNG imports, according to data from CEDIGAZ. Last year marks the third consecutive year in which the United States supplied more LNG to Europe than any other country: 27%, or 2.4 billion cubic feet per day (Bcf/d), of total European LNG imports in 2021; 44% (6.5 Bcf/d) in 2022; and 48% (7.1 Bcf/d) in 2023

Learn more about Phil Flynn by visiting Price Futures Group.