Fed signals strong demand for oil

The Fed minutes panicked the stock market, but is a more aggressive Fed signaling a boiling economy and, by default, strong demand for oil? The answer is yes, exclaims Phil flynn from the PRICE Futures group!

Global demand for oil is exceeding expectations, even with cases of the Omicron variant sweeping the world. It seems like when a pocket of demand slows down, there’s another place in the world that makes up for it. Oil prices sold in sympathy with the stock market, and it was not helped by the weekly inventory reports which showed massive accumulations of gasoline and distillate, but at the end of the day when you go through all the data and look at the four week moving averages, you realize that we are going to be facing an extremely tight oil market in the next few months.

It’s something we’ve been talking about for a long time, and that’s why we tell people to cover up all year round. We think we could get another higher wave at the dawn of the first quarter of the year. On top of that, the outbreak of violence in Kazakhstan due to rising fuel prices may be a warning sign for other parts of the globe. Europe faces record high energy prices and global stability issues could be real as the commodities super-cycle is just starting to heat up.

The New York Times reported that “Paratroopers from a Russian-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 police reporting that dozens of anti-government protesters were killed and hundreds injured. Foreign soldiers were dispatched after the town hall in Almaty, the country’s largest city, burned down and the airport was overrun by angry mobs. Police opened fire on the demonstrators, some of them armed, but also accused them of killing 13 police officers and injuring 353. Reports of the 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 time-limited and will aim to protect government buildings and military objects, the group said in a statement.

This is the first time in the history of the alliance, which is the Russian version of NATO, that its protection clause is invoked. The statement did not specify how many troops would be mobilized, although Armenia, which chairs its rotating presidency, has deployed 70 soldiers according to the statement. Time.

Overnight reports show that OPEC’s oil production rose in December, led by Saudi Arabia, but fell in Libya and Nigeria. OPEC’s production increased by 70,000 barrels per day to 27.8 million barrels per day, according to the report. Although the increase was pleasant, they are still far from their quota.

A lot of people laughed at the commodities super-cycle last year when we had a slight correction in prices, but I think it becomes more evident when you look at the global supply chain and look at this. is happening with regards to underinvestment in oil and gas. People are starting to realize that the market is going to be under-supplied.

For energy, one of the main drivers of inflation, the problem has become political. The rush for alternative energy, the demonization of investment and fossil fuels have all conspired to create a situation where the supply response to growing demand has fallen far behind. The Federal Reserve knows it is falling behind. This is why people think the Fed minutes raise the possibility of shrinking the balance sheet much faster than previously thought and fear that if inflation does not cool down we could see interest rates rise. , potentially, five times this year. At least that’s what some people expect. And while a more aggressive Fed might see a stronger dollar and some slowdown in investment, it won’t be a killer of the bullish oil market. The Fed will no longer produce oil and that is the key. Even with the Fed becoming more aggressive, demand for oil will remain strong and will most likely exceed supply. The Fed cannot print barrels of oil.

In a higher interest rate environment, shifting some of your money from growth stocks to energy stocks — old oil and gas stocks like the big guys. Exxon Mobil (XOM), ConocoPhillips (COP), Shell (RDS.A), Halliburton (HAL) and commodity stocks will be the place to be in this New Year.

As we said before, we didn’t expect oil to hit $ 100 in 2021, and believe it or not, even though we have been one of the most consistent oil bulls in the market over the years. past two years, we think we’re unlikely to hit $ 100 a barrel in 2022, unless there is a major event. We think we might see oil approaching $ 95 a barrel in 2022. One of the reasons we’re not seeing $ 100 a barrel this year is that higher prices and a more aggressive Fed could lower the price a bit. demand and it should hold. somewhat controlled prices.

We were one of the few who predicted the next gasoline price hike last year. Not only did we expect gasoline prices to rise due to the reopening of the economy and reduced refining capacity, but we understand the nuances Biden’s energy policy would have on the price of gasoline. ‘gasoline at the pump. Moratoriums on drilling and the cancellation of the Keystone pipeline sent a signal to investors that their money was not welcome in the energy space. Oil producers have made decisions based on fear of additional regulations the Biden administration may impose.

The Biden administration says drilling permits have increased under their administration. The reality is that most of those permits were obtained because they knew Biden would cut them off soon. There was a rush to get permits before it was too late. So the buyers who got these permits did so to get in before it was too late and not for well thought out business reasons. They feared the government would crack down. It is not the most efficient way for these companies to obtain permits. It was an act of desperation to stay one step ahead of possible government shutdowns.

Biden’s attempts to bring gasoline prices down with a release of the Strategic Oil Reserve backfired. Most of that oil has gone to places like South Korea and China and has done little to help American refiners produce more gasoline. Prices at the pump have come down, but mainly due to fears over the Omicron variant. We saw a big drop in demand for gasoline in last week’s Energy Information Administration report, but this is questionable because last week we saw a big increase. A lot of those gasoline numbers are discounted because they were more than likely year-end adjustments, and we believe gasoline demand will continue to exceed expectations.

Biden’s return to the Paris climate agreement has also been a signal for U.S. energy investors to stay away. His love for electric cars doesn’t match reality. The environmental impact of battery-powered electric cars has not been fully considered by this administration and the reliability of electric cars especially in light of what happened in Washington DC and Virginia with the snowstorm and traffic jams. , were not taken into account by this administration.

The massive electrification of the fleet is not ready for prime time. Everyone knows that electric cars are going to be a big part of the equation, but they have their problems. The autonomy of these vehicles is not conducive to economic growth. When you replace an efficient engine with an inefficient one, you are replacing the efficiency of the economy with inefficiency. This might be okay if you saw huge economic benefits in switching from gasoline cars to electric, but it is highly questionable and it is true that the country’s switch to all electric will or will not have the environmental benefits. that the Biden administration is hoping for. It has been very well documented that you would have to drive an electric car almost 120,000 miles just to get a balance on greenhouse gas emissions. The negative impacts of surface mining to get the materials to build all those electric cars should be considered and then what to do with those toxic electric batteries when they go bad. There are a lot of issues to be faced.

The EIA reported that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell 2.1 million barrels from the previous week. At 417.9 million barrels, US crude oil inventories rose 10.1 million barrels last week and are about 4% below the five-year average for this time of year. Inventories of finished gasoline declined while inventories of blending components increased last week. Distillate fuel inventories increased 4.4 million barrels last week and are about 16% below the five-year average for this time of year. Propane / propylene inventories fell 0.7 million barrels last week and are about 7% below the five-year average for this time of year. Total commercial oil inventories rose 10.2 million barrels last week.

Learn more about Phil Flynn by visiting Futures price group.

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Felix J. Dixon