Market bubble & SPR oil release has fulfilled its task

Cheers Everyone!

I still personally believe this rally will be short lived unfortunately BUT that doesn't mean we won't be going much higher heading into end of Q4.

Weaker dollar and rising US exports support oil

The most recent weekly EIA report on US oil stocks served as a reminder of the global oil market's tightening. Despite the fact that crude oil inventories increased by 2.6 million barrels, demand for US crude from abroad reached a new high last week, no doubt due to the significant WTI discount to Brent. Gross exports increased to 5.1 million barrels per day, while net imports fell to 1.1 million barrels per day. The 0.6% drop in refinery utilization is also deceptive, as the current 88.9% run rate is significantly higher than the comparable level of 2021 and the seasonal 5-year average. Because of the approaching winter and the upcoming boycott of Russian oil sales, refiners are incentivized to press the accelerator as hard as they can. Europe is eager to stock up, particularly on products, as evidenced by more than 4 million barrels per day of net product exports last week. As a result, distillate and gasoline inventories in the United States remain low. As a result, US refiners are making a fortune and will continue to do so in the coming months as crack spreads rise. WTI and Brent gained more than $2/bbl yesterday, RBOB remained elevated, and Heating Oil increased by $6.42/bbl equivalent.

Although global equities fell from their five-week highs, owing primarily to disappointing earnings in the technology sector, there is tentative optimism that central banks will begin to slow the rise in borrowing costs soon. This optimism is primarily based on the Bank of Canada's smaller-than-expected rate hike. Today is the ECB rate decision. As a result of the liquidation of dollar length, bond yields fell, contributing to the oil rally. Although recession fears appear to have subsided recently, continuing to bet on healthy economic growth will be foolish.

SPR oil release has fulfilled its task

After the OPEC+ producer group decided to cut production by 2 million barrels per day to support prices, the current US administration pledged to go full circle, with Joe Biden ordering the Department of Energy to release 15 million barrels of oil from emergency stocks. The coordinated scheme of using strategic oil stocks to rein in soaring prices, of which the United States has been the main proponent, has clearly been a success. Of course, the price decline was aided in part by the release of the SPR, as concerns about a recession, rising interest rates, and the strengthening of the dollar all contributed to the recent decline, which began in June. The fact is, however, that the US retail gasoline market, which serves as the yardstick against which every US administration is measured, has fallen in line with depleting SPR stockpiles. Pump prices peaked in the middle of June at slightly more than $5/gallon, when SPR stocks were 512 million bbls. SPR levels fell to 402 million bbls (around 830,000 bpd) over the next four months (or 19 weeks/133 days) and pump prices fell to $3.89/gallon. In fact, any politician worth her salt should argue that in the past 19 weeks, when pump prices averaged $4.22/gallon, the SPR release shaved 90 cents/gallon off the peak in June - even if this is stretching the truth a little. Over 133 days and at an average consumption rate of 9 mbpd, this equates to a $45 billion savings for US motorists.

The question now is whether re-deploying the SPR tool in the event of a renewed supply shortage or tight oil balance will have the same effect as it did last summer. And the answer is most likely no. To begin, it is debatable whether the White House would still advocate for the release of emergency stocks following the midterm elections. Second, as previously stated, the SPR is not the sole cause of the recent price drop. It appears to be losing effectiveness in recent weeks. Since the middle of September, when retail prices reached $3.77/gallon, US strategic stocks have dropped another 20 million barrels, but pump prices have risen above $4/gallon (though they have since fallen back to $3.89/gallon). Third, total SPR and commercial crude oil inventories in the United States are historically low. They are now at 842 million barrels, down 200 million barrels from a year ago and the lowest since October 2002. Fourth, selling crude from SPR will not alleviate product shortages if refiners are unable to convert it into different types of fuel. High run rates (93% on average since June) imply that additional capacity to produce more distillates and gasoline is scarce.

Members of the IEA also agreed to make an additional 60 million barrels of oil, crude and products, available until the end of the month, bringing the total to 240 million barrels. The impact in OECD Europe was comparable to that in the United States. German retail gasoline prices, for example, fell from €2.19/litre in early June to €1.77/litre in mid-August. A brief rally in August and September was followed by a gentle pullback, and the current pump price in Europe's largest economy is still less than €2/litre. It had the same impact on government-controlled stocks as it did in the United States.

The OECD's emergency stockpiles have fallen to historically low levels. According to the most recent IEA data, they fell from 1.42 billion bbls in April to 1.28 billion bbls in August, with crude bearing the brunt of the fall (-119 million bbls). The total decline in OECD Europe was 9.5 million barrels, and in Asia/Oceania it was 15 million barrels. The fact that government-controlled stocks in OECD countries are 234 million barrels lower than in 2019 is telling. The deficit in OECD Europe is 33 million barrels, while it is 23 million barrels in Asia/Oceania.

Further SPR release in the developed world would deplete emergency stocks to dangerously low levels, having the opposite effect - dwindling inventories usually correlate inversely to prices. So, what is left to mitigate future price increases? Nothing is off the table, according to the US. This includes providing incentives to shale producers, limiting product exports, and/or introducing the NOPEC bill. Several US shale executives have gone on record as ruling out increased production. Given the interconnected nature of the global oil market, a partial export ban would not alleviate a shortage, and accusing OPEC of market manipulation would only deepen the rift between consumers and producers and backfire. As an Iranian nuclear agreement appears more improbable than at any time in the last eight months, demand destruction appears to be the safest bet for lowering oil prices, and repairing ties with Saudi Arabia and its allies would not hurt the US's interests either.

Major rotation is going on in the markets

Like clockwork, the leaders of the last decade are getting hammered this week. Likes of Facebook and amazon are retreating faster than we've ever seen. This is concerning as in it shows what's going on under the hood. If amazon is showing weakness, where is there to hide? I personally think commodity related stocks are the safe haven to ride through the storm.

Plan tomorrow: We've followed my forecast to a T and now I think we're in store for one or two more up days before the fed sends us to new lows next week. Buckle up!

Still, all eyes on next Tuesday on what the fed will do next.

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