With governments’ continued war against fossil fuels, storage levels for crude (CL1:COM) and other products energetically march down the slope toward record lows. It’s time again, in our view, to start tracking that noisy, pesky, energetic rabbit to project future fossil fuel price directions. So grab your tracker and let’s head out.
The Material Balance That Isn’t Balancing
Since “empty the reserve storage program” began near the end of March, total crude storage has slide immensely. Crude storage at the end of March 19 equaled 1140 million barrels.
Since then, storage dropped to 875 million barrels at the end of August 19th shown next.
The change of 265 million barrels equals approximately a 11 million barrel loss per week. Noted above, crude production in recent weeks seems stuck around 12 million barrels a day or 1.5 million per day short of consumption.
Our tracking device next leads us toward consumption. A chart included below shows gasoline delivered from 2019 through 2022 to-date. With increasing prices, gasoline consumption dropped approximately 0.5-0.7 million barrels per day beginning in the April-May timeframe. Usage is now in the 8.5-8.7 million barrels.
Next, our tracker heads to observe diesel/distillates consumption shown in the next Statista slide, which shows trends remaining within normal ranges in spite of strong price increases.
The Energy Information Summary of Weekly Petroleum Data for the week ending August 19, 2022 states that gasoline storage is 7% below its five-year average while crude minus the SPR is 6% below.
This trend on pricing is probably the most telling for investors. Developed from crack spread self-generated, gasoline pricing for the Gulf Coast reaches a peak in June at just north of $4. In recent days, it dropped just below $3. Probably most telling is the difference between gasoline and diesel prices. Prior to June, the difference averaged near $0.50, disappeared in June and reappeared in August now trending near $1.25. Since, refineries are operating at 94%, translated, full rates, the markets are stressed even with a measurable level of gasoline usage destruction. Also, the Gulf Coast 2-1-1 crack spread tracked upward, back to near $50 in the past week, less than the $70 it reached in June, but still much higher than the normal $20 prior to 2022. Finally, an article from OilPrice titled U.S. Diesel Prices Are Back Above $5 by Tsvetana Paraskova reminds us of how stressed the markets really are.
Putting our tracker back to work on an overseas path, the news isn’t any better. Referring to global spare capacity, the energy expert said that “across the board at OPEC+, even included Saudi, there is not the spare capacity that people perceive there is.” Though uncertainty exists on the foreign front, some analysts believe it’s under 2 million barrels per day. Finding solutions to shortages from overseas isn’t likely.
The Investment Opportunity
The petroleum material balance isn’t balancing and is in extreme stress. Diesel is already breaking north. Crude, with its infusion of SPR inputs, a measured level of demand destruction from high gasoline prices and the late summer weakness, drifted crude pricing back toward $90. But, most recently, our tracker picked up choppy action ranging between $90 and $100.
The next slide shows a longer period for crude pricing. In the late 2000’s, prices reached at or above $130. During an earlier portion of this year, the price rose again to that old high.
The Investment Marketplace
Our tracking continues toward finding an investment direction. Many traders have abandoned crude trading claiming extreme volatility. Regardless, two factors drive this unprecedented movement, 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, demand destruction through high prices, or increasing output. Evaluating the first, recessions, Seeking Alpha’s The Energy Realist wrote an excellent article titled A Recession Won’t Push Oil Below $100, At Least Not For Long, which argues that with the exception of the 2020 virus shutdown, history teaches that recessions don’t severely impact demand. (This is an excellent article which provides significantly more detail than ours. We strongly encourage readers to go read.) His data suggests that more typical recessions drop usage by 5% +-. From the above charts, demand destruction has already cut a total U.S. usage by 2.5% still way short of the needed 1 million barrels a day plus. Yet, recession rumors are manipulating pricing. August 30th was a perfect example, oil dropped almost 5% due to overnight recession chatter.
With regard to increasing supply, the U.S. had the ability to close this gap and chose otherwise. Returning production to its 2019 peak of 13 million barrels per day and finishing the Keystone pipeline at 800 thousand barrels per day would have solved the issue.
The last option, high price demand destruction seems to be the most likely. Goldman Sachs is still a strong believer. In its view, $130 plus in crude price is needed for a sufficient reduction to occur. We aren’t sure about the price, but we strongly accept this view. The crude oil chart above shows that old high at $130. Our belief is that in time that price will once again return. We are bullish on entities with significant exposure to crude, natural gas, or fossil-based products.
The bullish story doesn’t quite end yet. Our tracker points at 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 an electrical subsystem fire. This facility refines 5% of the U.S. crude oil. Gas in the Chicago area jumped $0.30 over night. The Southwest, where most of the refineries are located, faces the beginning of hurricane season. A major storm hitting either the Texas or Louisiana coast in this tight market would spike product prices over night. Our overseas tracker continues its watch on Libya, a country prone to multiple politically sourced outages.
The crude oil marketplace will be volatile, the negative effect from recession chatter continues to negatively move pricing. But, overall, our tracker, chasing that noisy bunny, keeps pointing 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 to it.