Energy and Fossil Energy Bullish Stance Continues (Commodity:CL1:COM)
The material balance that does not balance
Since the “reserve storage dump program” began towards the end of March, total crude storage has dropped significantly. Crude storage at the end of March 19 was equivalent to 1140 million barrels.
Since then, storage has fallen to 875 million barrels at the end of August 19 shown below.
The change of 265 million barrels is equivalent to a loss of approximately 11 million barrels per week. Noted above, crude production in recent weeks appears to be stuck around 12 million barrels per day or 1.5 million per day less than consumption.
Our tracer then leads us to consumption. A table below shows gasoline delivered from 2019 to 2022 to date. With rising prices, gasoline consumption fell by about 0.5 to 0.7 million barrels per day from April-May. Utilization is now in the 8.5 to 8.7 million barrel range.
Next, our tracker moves to the diesel/distillate consumption observation shown in the next Statista slide, which shows trends remaining within normal ranges despite sharp price increases.
The energy information summary of weekly oil data for the week ending August 19, 2022 shows that gasoline storage is 7% below its five-year average, while crude minus the SPR is 6% lower.
This price trend is probably the most telling for investors. Developed from the self-generated crack spread, gas prices for the Gulf Coast peaked in June just north of $4. In recent days, it has fallen just below $3. Most telling is probably the difference between gasoline and diesel prices. Prior to June, the difference averaged nearly $0.50, disappeared in June, and reappeared in August, now trending toward $1.25. Given that refineries are running at 94%, translated, full throttle, markets are stressed even with a measurable level of destruction in gasoline use. Additionally, the Gulf Coast 2-1-1 crack spread has risen back to near $50 last week, lower than the $70 it hit in June, but still much higher than the normal $20 before 2022. Finally, an article from Oil Prices titled US diesel prices are back above $5 by Tsvetana Paraskova reminds us how tight the markets are.
Putting our tracker back to work on an overseas route, the news isn’t any better. Referring to the global spare capacity, the energy expert said that “in all of OPEC+, including Saudi Arabia, there is not the spare capacity that people perceive.” Although uncertainty exists on the foreign front, some analysts estimate it to be below 2 million barrels per day. Finding solutions to shortages overseas is unlikely.
The investment opportunity
The material balance of petroleum does not balance and is under extreme stress. Diesel is already breaking through to the north. Crude, with its infusion of SPR inputs, a measured level of demand destruction from high gas prices and late summer weakness, took the price of crude back towards $90. But, more recently, our tracker picked up choppy action between $90 and $100.
The next slide shows a longer time frame for crude prices. By the late 2000s, prices were reaching $130 or more. At the beginning of this year, the price again reached this old peak.
The investment market
Our follow-up continues towards the search for an investment direction. Many traders have abandoned crude trading citing extreme volatility. Either way, two factors are driving this unprecedented move, fears of a deep recession and tight, undersupplied markets. In past recessions, the undersupplied market was absent. In reality, three different cases are likely to determine a winning direction: deep recession, destruction of demand by high prices or increase in production. Assessing early recessions, The Energy Realist of Seeking Alpha wrote an excellent article titled A recession won’t push oil below $100, at least not for long. who argues that with the exception of the virus stopping in 2020, history teaches that recessions do not have a severe impact on demand. (This is a great article that provides much more detail than ours. We strongly encourage readers to go read it.) His data suggests that more typical recessions drop usage by 5%+-. From the charts above, demand destruction has already reduced total US usage by 2.5%, still well below the 1 million barrels per day requirement and beyond. Yet rumors of a recession are manipulating prices. August 30 was a perfect example of this, oil fell nearly 5% on rumors of an overnight recession.
In terms of increasing supply, the United States had the ability to fill that gap and chose the opposite. Bringing production back to its 2019 peak of 13 million barrels per day and completing the Keystone pipeline at 800,000 barrels per day would have solved the problem.
The last option, the destruction of high-priced demand seems to be the most likely. Goldman Sachs is still a strong supporter. In his opinion, it takes more than $130 of the crude price for a sufficient reduction to occur. We are not sure of the price, but we strongly agree with this point of view. The Crude Oil chart above shows that former high at $130. Our belief is that over time this price will return. We are bullish on entities with significant exposure to crude oil, natural gas or fossil fuels.
The bullish story is not quite over yet. Our tracker indicates catastrophic events, i.e. equipment failures at refineries or weather-related storms along the Gulf Coast. BP lost its Whiting, In refinery last week due to a fire in an electrical subsystem. This facility refines 5% of US crude oil. Gas in the Chicago area jumped $0.30 overnight. The Southwest, where most refineries are located, is facing the start of hurricane season. A major storm hitting the coast of Texas or Louisiana in this tight market would drive up commodity prices overnight. Our overseas tracker continues to monitor Libya, a country prone to multiple politically induced blackouts.
The crude oil market will be volatile as the negative effect of recession chatter continues to negatively affect prices. But, overall, our tracker, chasing that noisy bunny, continues to point to a bullish crude market at least until prices reach near or above $130. Buying crude-related entities on weakness might be an investor’s dream. Our tracker certainly points it.