A FEW RAMBLINGS AND OPINIONS REGARDING INFLATION, ENERGY, ETC.

The PCE numbers for January finally arrived yesterday, so the January numbers...

Nothing to extreme. I recognize much of February reportage has been completed, so the laggard is the PCE, which will see next release around April 9th.

Obviously the CPI for February was 2.4%, and we can all expect that to jump for March. Energy prices alone, will drive inflation up by nearly a full percent, for the month of March. I would expect the overall y/y to be in the 3.2%+ range for March.

It should be noted that California prices will distort the national average. California is unique, due to nearly no access to the SPR (no pipeline, Jones Act), in direct competition with east Asia over Alaskan crude. Additionally, 30% of their crude imports ... comes through the Straits of Hormuz. California imports 60% overall. 

Simple math indicates 18% of their refinery inputs are in serious danger of being impacted. It would not be unreasonable to see the pump prices in California breaching the June, 2022 highs. Gasoline- $6.438; Diesel- $7.011.

Natural gas prices are not substantially higher and should not increase due to the situation in the Persian Gulf. The reason being simple... The U.S. facilities for processing NatGas to LNG are already at full operation. 

It is possible that various nation's SPR release might stem to spikes temporarily, but the capacity of withdrawal is one of the questions, as well as shipping availability. Ships can't magically appear overnight... at any given port.

Frankly, I see no easy solution. 

Globally, Asian countries are very vulnerable, with the exception of China.

Curiously, Iran has stated that crude priced in Chinese Yuan would be allowed passage. China might gleefully go along with that, but considering the impact on the yuan/dollar exchange rate, as well as holdings in dollars held by China... maybe not. 

Some Random Thoughts on 10-18-2022

Let's see if I can get through a post without any charts or graphs.

I had previously mentioned the likelihood of heating costs being a shock in late January or February. Maybe next month, as this current cold snap might be a wakeup call. Of course, the bills won't come before the election.

I hear rumblings of another SPR release. Seeing as the current release is scheduled to end at the end of the month and the election is 8 days later... I doubt it happens. Got to save some ammunition for 2024.

Uh oh... I feel a chart coming on...

Click to Enlarge

I do recall a couple of releases, such as 30M barrels for late 2021 and the 1M barrel per day release starting on May 1st and ending on October 31st. The latter indicating another 40M barrels to go and the ending number at 370M barrels. Somehow the numbers aren't adding up. When they say 14M, do they really mean 20M? About half of the SPR will have been drained in 2 years. It should all be gone by 2024. 

Somehow the crude oil inventory of the U.S. is 12M barrels higher than this time last year, with crude prices less than 1% higher. The gasoline inventory is 12M barrels lighter than this time last year, with gasoline prices 16.4% higher. So is it a crude problem or a refining problem? 

The American people are easily misled and manipulated, so crazy statements will not called out by anyone and certainly not our press. If the TRUTH were a woman, our nation's press (and politicians) would be called misogynists, for their mistreatment, disregard and abuse of the truth.

In any case, the American people have an abundance of gullibility, for the politicians to exploit. 

I don't really know who is going to win, but I am becoming sick of those January 6th hearings and they would end if the republicans take the house. Then I will become sick of the Hunter Biden hearings for 2 years. That's about the only change I can see happening.

Is there anyone out there... that is worth a damn?

Allow Me To Butt In, With a Rebuttal of Sorts

Here is the premise...

Some politician said it is the patriotic duty of gasoline suppliers to reduce costs and some rich dude says the politician is misdirecting or unaware of how the market works. This happened to flow right into some of my social media accounts.

This prompted one poster to reply with this. I won't do a screen capture, as it might be some violation of something. You can open the link. Crude Oil (WTI) is up 40% and Gasoline is up 60%, both from 1 year ago. It does seem to support the theory, that gasoline prices are out of line.

The problem being WTI and Brent are Global Benchmarks and Gasoline is basically a U.S. market... benchmark. So why is this? (click to enlarge)

This seems to have started diverging last fall. Here is the Price history of WTI Crude and Gasoline Futures. Which seems to be the product of exporting more gasoline than importing. For that information, here is the export history and the import history. (Weekly, in thousand of barrels).

IF gasoline futures had stayed in line with WTI, the futures would be around $3.44 and we (U.S.) would be averaging around $4.29 at the pump... nationally, and we would still be griping. 😭

I made this easy(?) to read graph on the difference...

Yes, we have upped the exports of gasoline and thereby forced the gasoline futures to battle with global pricing structures... just to keep gasoline in the USA. 

I didn't check on every country, as various countries are subsidizing, but I do keep tabs on the U.K. Even when factoring in the U.K. using a bit higher octane rating, the U.S. gasoline is a bit cheaper... when backing out taxes. This is not intended to explain away U.S. prices, but rather the nature of global pricing structures.

As to the patriotic theme, that is clearly intended for an American audience that sees a familiar name and thinks of it as an AMERICAN brand. In fact, they are Multi-National (Global) Enterprises. So they likely are being patriotic... but to what nationality?

Our patriotic politicians could reinstate the crude oil export ban, that was overturned in late 2015, and it would bring down the WTI price, but does not help the gasoline side of the equation, as there were no limits on gasoline exports. 

Has releasing 1 million barrels a day from the SPR done anything? Why yes, it has kept the WTI from going through the roof and gasoline following a similar track. 

Speaking of the SPR, with the draw of 1 million barrels per day to end at end of October... the U.S. is already planning to replenish those barrels.

Not sure what that will do to crude or gasoline futures, but there will be somebody, somewhere, ready to complain and blame someone. That someone will always be of the opposite political persuasion. 

It is sad to watch... but somehow, very entertaining as well. 

As for the Crude oil and petroleum products, much the same trend, for those interested...

Strategic Petroleum Reserve and Politics?

I have read a couple of times, where our leaders have asked OPEC and others to turn on the oil spigot to overcome some shortages of crude. I have even read where the president has "released" some crude out of the Strategic Petroleum Reserve (SPR).

On the other hand, "we are trying to talk" about reducing fossil fuel consumption, particularly now that COP26 is underway. I say trying to talk, because I doubt anything meaningful will be adopted, except for promises yet to be broken... again.

I am not the brightest bulb in the pack, but it would seem to me that a commitment to reduce reliance on fossil fuels would also consider a plan to reduce the SPR over time. While this might seem an odd thing to do, it would reduce the current inflationary effects of crude prices as well as send a signal that we are moving away from this fossil fuel. 

Naturally an argument could be made that this method would cheapen the market price of fossil fuels, which would prolong their consumption, while reducing the current state of semi-independence for imported fossil fuels. However, I would consider a gradual reduction to be in order. Something akin to a planned reduction of 170,000 barrels per day for 10 years.

Of course, there is the horse and buggy phenomenon.  I am referring to the period where cars started to become mass produced. The horse and buggy industry saw the writing on the wall, ceased expansion and began reduction of inventory, etc., which became very profitable for a brief period, until the industry virtually faded away. 

We are seeing the beginning states of this in the U.S. oil production companies, in my opinion. It is quite a tightrope to walk between keeping these producers operating at near net import/export levels or accelerating the reduction in U.S. Oil. 

The origins of the SPR are rooted in the 1970s and an oil embargo. Here is a brief overview, entitled... History of the Strategic Petroleum Reserve. Here is some SPR Quick Facts. Then there is the IEA, with The global oil market remains vulnerable to a wide range of risk factors. Which states in part...

In accordance with the Agreement on an International Energy Programme (I.E.P.), each IEA country has an obligation to hold emergency oil stocks equivalent to at least 90 days of net oil imports. 

Which brings me to current situation... (the upper cut off is the 90 day line, which was broken through at various times in the early 90s and has been above that threshold since 2-2012)

Currently, the total volume of SPR is 614.2 Millions Barrels. Here is the 4 week net average of imports/exports from the EIA. Whatever measure... the 90 day rule applies would indicate a net import of 6.8M barrels per day... a figure not seen that high in 8 years. Currently it is running in the 1M barrels per day and below range. 

Clearly, the internal production of the U.S. oil industry could begin to fall to the wayside, if crude prices were to fall, and it is understood that financing of the industry could begin to subside, but at some point near the end it would collapse. 

Hence the politics angle. Any suggestion of sizable reduction at this point would be a nightmare for certain D.C. politicians of both stripes. There are those beholden to the oil industry, which would receive a dramatic drop in prices and those beholden to the green energy sector, for allowing a drop in energy prices to prolong the use of fossil fuels. 

That is why I would suggest that slow drawdown over a long period. No one really wins.

But that is just my silly idea, and I realize the notion of releasing a fossil fuel during a global climate meeting is preposterous. Not addressing the SPR is kicking the oil can down the road, imo. Not unlike what the global community is doing with climate change.