As 2022 winds down and 2023 approaches, the energy sector remains in tremendous turmoil. Many outstanding factors are essentially open doors to the future price of the most valuable commodity on Earth. European price caps, Chinese demand and the realization of a first ever global recession are driving fear into the market.
As a long time oil man, fear is not a factor for me. I make my decisions based on logic, data and trends. While many “analysts” are out in the market spreading fear of lower oil prices, it simply isn’t adding up. No matter what soon is placed on the pricing of a commodity, it all comes back to the basic use of the oldest measure in the book…supply and demand.
The current president has been nothing short of a trade by for this nation’s energy supply. Within an hour of taking office Biden began his war on everyone by shutting down the Keystone XL pipeline. Months later he began cancelling federal drilling leases in Alaska, Utah, the Gulf Coast and off the Atlantic. The results of this on the supply have been clear to see.
How bad is it getting?
We are currently 7% below the five-year average for this time of the year at 418.2 million barrels. This follows a weekly addition of 10.2 million barrels for the previous week, which happens to be one of the biggest weekly increases in inventories this year.
As far as gasoline is concerned, the Energy Information Administration (EIA) just estimated an inventory increase of 2.5 million barrels for the week to December 16. This is a 2 million barrel decrease from the previous week.
After destroying domestic inventories and market momentum, Biden went to Saudi Arabia to beg for oil to replace American producers. He has not only failed to get our nation more supply, but he also actually angered the Saudi’s enough to lower their production by 2M barrels a day. Not only did Biden fail to support American energy, he ultimately reduced global supply in a single 2 day trip. Adding to the calamity of errors he has placed sanctions on the worlds next higher producer, Russia, and they have followed suit with the Saudis reducing supply by more than 2M barrels a day. This series of catastrophic failures has not only created a deficit in the United States, it has created a massive supply gap across the globe.
So, in short, supply is low, really low, all across the globe. But what about demand?
As I wrote about last week demand has been greatly impacted by the Covid lockdowns in China. Currently hundreds of millions of consumers are not allowed to leave their homes. This looming demand spike is on its way to the markets, it is no longer a matter of “if”, it is a matter of “when”.
This along with “fears” of a recession and a lack in transparency in demand reporting have been consistently driving market sentiment towards believing that there is a demand deficit. This is patently untrue. All you have you do is leave your home and drive to work to see the demand that truly exists.
Traditionally demand does drop in recessionary times. But these are not “traditional” times by any stretch. After seeing 2 consecutive drops in GDP, we didn’t state the obvious, that we are in a recession, the administration used it power to change the definition of a recession to avoid scrutiny. But I digress.
For the first time in history, we are approaching a global recession as evidenced by Japan recently de-pegging their 10 year note and lifting interest rates for the first time in 2 decades. We are in truly uncharted waters. It is my belief that we will not see a drop in demand this, time, but a small spike. Not only will China come back online but other nations will still have to fight through difficult economic times, which will require the same, if not more energy.
From simply looking at the data listed above, I tend to agree with the recent assessment of the Daniel Yergin, vice chairman of S&P Global who told CNBC “Crude oil prices could reach $121 per barrel when China’s economy reopens following a string of Covid-related restrictions”. This, to me is sound advice for oil and gas investors moving into 2023. We are bullish on the price of oil, we are bullish on American energy and we are preparing for the boom cycle ahead.
