Riding the Oil Markets? Fasten Up, Volatility is Ahead

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Editorial by Geoffrey Lakings for Industrial Info Resources (Sugar Land, Texas)--In our last IIR Energy Featured Content on Crude & Products: An Oil Price Tug o' War in the Making, we touched on the ongoing struggle between supply and demand, seeking to determine what market factor will provide the ultimate price direction. Well, according to this week's IIR Market Scorecard: Debt, Dollar & Demand, the market now understands that, yes, "economics" are winning out.



West Texas Intermediate (WTI) prices have dropped $10 over the past month to levels last seen in April, prior to the "surprise" OPEC+ announcement. But where will we go from here? Will the proverbial bottom fall out of this market?


Source: FX Empire

As IIR Energy's (IIRE) Hillary Stevenson discusses in A View from the Hills:

• WTI Front month prices fell for a fourth week, down $1.30 per barrel (BBL) week-on-week to $70.04/BBL on May 12, after trading at more than $73/BBL throughout the week.
• Prices for the remainder of 2023 and 2024 are close to their lowest levels since the start of 2022.

But fundamental indicators remain bullish, even as WTI futures have slipped lower on a worsening economic outlook and the impacts it could have on oil consumption--factors which could provide a floor, and then an upside, to this market.

Following OPEC+'s announcement, the International Energy Agency (IEA) is more or less shouting: "Whoa, slow your horses economic pundits! We believe that demand is, indeed, out there."

• WSJ: China's Demand for Oil Hits Record as IEA Raises Global Forecasts - China's insatiable demand for oil is growing at a faster-than-expected pace, threatening to tighten crude markets and send oil prices higher as supplies struggle to keep up, the IEA said.
  The Paris-based agency's latest outlook points to a widening divide between booming demand for crude across the developing world and lackluster demand in Europe and North America, where economic prospects look bleak.
  It also highlights a growing disconnect between oil prices--which have tumbled to their lowest levels in around 16 months in recent weeks--and expectations that strong demand for oil and limited supplies will prompt a sharp deficit that many analysts expect to lift oil prices.

So, China's insatiable demand is growing at a faster-than-expected pace. However, China's imports have fallen to just more than 10 million barrels per day (BBL/d) in April, from more than 12 million BBL/d in March. Hmmm.

As mentioned in the Scorecard, the world's eyes are on the U.S. debt-ceiling soap opera, with even President Joe Biden curtailing his recent trip to Asia to participate in further negotiations:

• CNBC: Biden to cut Asia trip short to return and negotiate debt ceiling - The U.S. will hit the debt limit as soon as June 1, Treasury Secretary Yellen has warned.
  President Biden will cut short a visit to Asia as the push to strike a deal to raise the nation's borrowing limit grows more urgent, according to a source familiar with the president's plans.
  The White House had emphasized how Biden's attendance at a summit of the Group of Seven major industrial countries in Japan this week would shore up optimism that the U.S. is able to resolve its differences at home.

These debt ceiling talks are weighing heavily on the energy commodity markets:

• Reuters: Oil prices dip with all eyes on U.S. debt talks - Oil prices dipped on Thursday, as traders warily watched for signs of progress on talks to raise the U.S. debt ceiling.

IIRE's Hillary Stevenson goes on to say: "Notwithstanding bearish sentiment, calendar spreads have been flattening as global oil inventories have reached their 10-year seasonal average, in part due U.S. Strategic Petroleum Reserve (SPR) withdrawals. On the other hand, gasoline and diesel stocks remain below seasonal averages, keeping prices and crack spreads high. An economic downturn could help rebuild refined product inventories, while increased demand would tighten the market and increase prices."

Speaking of SPR withdrawals and their market impact:

• TAP: The Energy Department Is Spoiling Biden's Plan to Stabilize Oil Prices - The U.S. Department of Energy (DOE) appears reluctant to use the SPR to buy and sell crude oil in a way that would 'step into a quasi-market management role.'
  The SPR strategy is one example of a broader willingness by the Biden administration to intervene directly in the economy, especially when prices climb or investment flags. It signals the White House's new approach to targeted stimulus and industrial policy.
  It is also rapidly becoming a test of that approach. The administration appears to be facing a principal-agent problem: The DOE has dragged its feet on carrying out the plan.
  The agency's reluctance could become a bigger headache for Biden. Using the government to spur private investment requires an executive who inspires confidence. Investors need to trust that the White House will make good on its pledge to purchase oil. And right now, Biden's energy agency is undermining that credibility.

Stevenson postulates that that the DOE is doing the best it can:

• they needed to perform maintenance on some of the caverns (some of the mandated SPR sales were to fund the repairs), as the White House asked Congress for $500 million to modernize the SPR
• they can't inject at the same time as they are releasing (remember, they use fresh water for the SPR and not a brine pond)
• the bids for SPR repurchase in December either weren't the right price or were the wrong crude quality (the bid was for sour)
• the comment about the forward sale is sort of suspicious (why haven't they bought for future delivery?), but again this is not something they have done before and don't have a procedure in place

Also, these sales likely benefited the integrity of the storage caverns themselves:

• Reuters: Record oil-reserve sales may have benefited U.S. storage caverns - Sandia National Laboratories, which monitors the health of the salt caverns, said the use of fresh and brackish water to push the oil out and maintain the integrity of the caverns did not damage the site and may have lengthened their lifespan.
  "Some of the cavern shapes have improved from the large influx of raw water, which may allow for an extension in cavern lifetime," said Anna Lord, a geosciences engineer at the Sandia National Laboratories.
  "There have been no major impacts to the caverns," wrote Lord in response to Reuters questions on the state of the caverns. The raw water can smooth the internal features by removing older, rough walls, she added.

So, as FX Empire indicates, what one can truly count on in these uncertain times is more volatility:

• FX Empire: Oil Price Forecast: Volatile Amidst Debt Ceiling Talks, Strong Fuel Demand - On Thursday, oil prices fell in early Asian trade as traders warily watched for signs of progress on talks to raise the U.S. debt ceiling, following a surge of nearly 3% in the previous session, fueled by optimism over U.S. fuel demand. Investors were eagerly awaiting further evidence that a debt ceiling deal would happen soon, as markets remained in a "wait-and-watch mode" over the outcome of the negotiations.

As this volatility could even be further spurred from an operational perspective, as Stevenson mentions:

• On May 17, Valero shut down and evacuated the West Complex of its 232,700-BBL/d refinery in Corpus Christi, Texas
• The facility experienced a leak and fire on the 58,000-BBL/d gasoline desulfurizer unit
• The East Complex remained online
• Alberta wildfires have shut some conventional oil and gas production and gas midstream infrastructure, while oil sands production remains in the clear. (IIR News: Alberta Wildfires Sideline Oil & Gas Development)
• Some concern that NGL outages will cause diluent shortages which would in turn impact oil sands delivery
• Seems unlikely, unless outages are extended for several weeks
• On May 15, Marathon's 75,000 bpd Ultraformer at its 495,000-BBL/d Galveston Bay refinery was taken offline due to a fire.
• Meanwhile, Pemex's 340,000-BBL/d Deer Park refinery continues operations, despite a major fire at the neighboring ethylene cracker on May 5.

On top of all that, multiple extreme-weather events, such as the wildfires in Canada, flooding in Europe, fires in Russia and Africa, and storms in Asia-Pacific are posing significant threats, according to IIR's GeoXplorer Disaster Impact Tracker.



How will all of this seeming craziness play out? Its anyone's guess, as the overall crude outlook still remains hazy.

Therefore, let IIR Energy's Dedicated Market Research place the world at your fingertips. Tomorrow's News Today. Ask us! We have answers!

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Additional IIR Resources:

• IIR Team Email: iirteam@iirenergy.com
• Latest IIR Crude & Products Market Scorecard

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).