OPEC Meeting Monday - What's oils reaction?
Cheers Everyone!
What a month it was for oil. Right back to where we all started in the first place. Funny how that works huh? All eyes are pointing to Monday and the start of the OPEC meeting to decide the summer fate of oil. Which we think prices will be elevated from here through Q3 and beyond given the current macro environment.
Looking at the chart above, we finally broke the major support for it to only be reclaimed with some authority in a short amount of time. Is the worst over? We think so. Here at Gallatin, we believe prices will be in a healthy range of $70-$100/barrel throughout 2023 with the current OPEC restrictions on supply.
Summer is coming
The days are lengthening and the weather is warming. Spring has finally arrived. The beginning of April signals the conclusion of the American heating season, which spans from October to March, and the beginning of the northern hemisphere driving season. Despite the fact that the summer driving season in the United States begins in May, gasoline demand in the country has reached an all-time high. This week, the United States consumed 9.14 million barrels per day of gasoline, the highest level so far this year. Yet, consumption remained steady on a four-week average basis as compared to the same period previous year. But, while gasoline consumption fell short last summer, a repeat performance is unlikely this year. According to the EIA, US motor gasoline consumption will average 9.08 million barrels per day during the following two quarters, up from 8.94 million barrels per day in 2Q-3Q 2022.
The increase in demand for motor fuel coincides with a drop in pump prices. According to the EIA, the average normal gas price in the United States on March 27 was $3.42/gal. This is marginally lower than last week's average price and significantly lower than the year-ago figure of $4.23/gal. Going ahead, gas prices will rise as oil prices recover and summer gasoline demand exceeds last year's level. Yet, if the EIA's newest projections are correct, the upside will be limited. The US Energy Information Administration predicts that US gasoline prices will average $3.41/gal in the second and third quarters, down from $4.29/gal in the same period last year.
While demand surpassed 9 million barrels per day for the first time this year, US gasoline stockpiles declined for the sixth week in a row. As of March 24, stockpiles have decreased by 3 million barrels to 226.7 million barrels. This has resulted in fuel supplies being 5% lower than a year earlier and 3.4% lower than the five-year average. Meanwhile, increased demand and stock reduction have boosted gasoline crack spreads. The RBOB/WTI crack is currently trading around $38/bbl, compared to roughly $30/bbl this time last year.
As of now, the US gasoline complex is throwing out optimistic price signals. And, predictably, a significant structural change in the market occurred this week. Because of the seasonality of product demand, gasoline prices often trade higher than diesel prices throughout the summer months. For the first time since last May, the CME RBOB futures contract settled at a premium to the comparable diesel price on Wednesday. The expectation of higher American gasoline usage should keep gasoline prices ahead of diesel in the coming months. Hedge funds and other money managers share this viewpoint. According to CFTC data, net speculative holdings in CME RBOB futures were 36 million barrels in the week ending March 21, more than tripling the quantities held in CME Heating Oil futures.
Much has been written about gasoline's long-term decline as engines get more fuel-efficient and electric vehicles become more popular. But, at the present, American gasoline demand is in the early stages of what is expected to be a good year. For oil bulls, the focus is currently on China. Nonetheless, the medium-term demand picture for US gasoline is improving.
Dollar Trouble
The US dollar is under jeopardy. The US dollar is falling in value against a basket of international currencies. The dollar index has fallen back below 103, testing levels last seen nearly two months ago. The broad-based dollar weakening is the result of a double whammy of improved risk appetite and a shift in Federal Reserve discourse. The dollar's safe-haven appeal has recently been eroded by diminishing fears about the global banking system. Authorities on both sides of the Atlantic have made steps to restore trust in the banking system, paving the path for investors to return to risk assets.
Coupled with the market's risk-on mindset, the expectation of a dovish Fed tilt has further depressed the dollar. The US Federal Reserve hiked interest rates earlier this month but did not mention in its most recent policy statement that a "ongoing increase" in rates is likely. This is being viewed as a sign that the Federal Reserve's monetary tightening cycle has come to an end. Similarly, Reuters reported this week that markets are pricing in a 55% chance of the Fed holding interest rates steady at its next meeting in May, with a rate cut as soon as July. This is the moment that so many dollar bears have been waiting for. It's no surprise that the wind has gone out of the dollar bulls' sails.
The probability of the Fed lessening policy tightening has contributed to the US dollar's depreciation. But what makes it much worse is that several of the world's biggest central banks, notably the European Central Bank and the Bank of England, are still raising interest rates. In doing so, they have taken up the hawkish mantle left by the US Federal Reserve. In short, the conflicting rate outlook is exacerbating the dollar's woes.
The dollar has gone into reverse. But, each decline means more good news for energy importers. For all, a weaker dollar makes oil less expensive for buyers holding foreign currencies, which might boost demand. This is especially true for Asia's energy-importing behemoths.
What is the future of the world's reserve currency? Indeed, the announcement of major US inflation statistics on Friday will undoubtedly cause some volatility. The Fed's preferred inflation indicator, the core PCE price index, is expected to show that underlying price pressures remained robust in February. If this scenario plays out, the US dollar has a chance of recovering. But, if inflation figures come in below expectations, the dollar is expected to lose ground against its top counterparts.
Regardless of the next inflation number, it will be difficult for the dollar to overcome its unfavorable bias. Overall, the US dollar will continue under pressure in the medium term. The newest CFTC data supports the bearish prognosis for the dollar. In the week ending March 21, leveraged funds' short bets in the ICE Dollar Index futures contract outnumbered longs by a factor of more than two to one. The dollar's weakness is here to stay, much to the satisfaction of those expecting a spike in global oil demand.
Have a great weekend!