Analysis by Sydney Casey
This week, the financial landscape was shaken by an unprecedented banking crisis that has left markets reeling and investors on edge. For instance, Goldman Sachs raised its 2023 recession probability from 25% to 35%, noting that risky assets like equities and commodities could face pressure. In the eye of the storm, the oil prices are at levels not seen in over a year in response to the mounting uncertainty. On the other hand, Chinese demand is soaring, with Jan-Feb economic data outpacing December’s numbers. As we delve into the intricate interplay between fuel prices and market outlooks, we will also explore potential long-term implications from the recent projections released by the EIA.
In addition to the volatility in the marketplace, traders are also considering long-term trends revealed in the EIA’s latest annual report. The EIA unveiled its 2023 Annual Energy Outlook yesterday afternoon, projecting that US energy-related CO2 emissions will decline for years to come. The EIA shows US petroleum demand remaining steady through 2040 in most scenarios even as the adoption of renewables accelerates, and production will remain “historically high.”
On the climate front, the agency uses 2005 as the reference year because the Paris Agreement calls for greenhouse gas emissions to be 50-52% below the 2005 level by the year 2030. This year’s report shows 2050 energy-related emissions down 17% from the projection last year as a result of several factors, including the Inflation Reduction Act (IRA), updated energy technology costs and performance data, an adjusted macroeconomic outlook, and other contributing elements.
The United States should continue to be a net exporter of natural gas and petroleum products through 2050 because of elevated foreign demand driving ongoing increases in domestic production and marginal growth in domestic consumption. The EIA anticipates US production to stay at record highs despite the fact that domestic consumption of petroleum and other liquids is not projected to fluctuate significantly through 2040.
Prices in Review
Prompt crude prices are up 20c/bbl yet are expected to see their biggest weekly loss of the year of over 8%. As worries about the economy grew following the SVB collapse, crude prices this week have dropped to their lowest levels in more than a year. Although lower, fuel prices have been more insulated from the macro-pressure. As the Petroleum Market at a Glance chart at the end of this article shows, crude prices have dipped more quickly than gasoline and diesel, but there’s been an overall convergence of crude and refined products over the past few months as diesel prices have fallen in line with gasoline and crude rates.
Adding to pressure this week has been an EIA inventory report that showed crude stocks rising, putting further downward pressure on the market. Gasoline and diesel inventories both fell, which helped limit losses for those products, but rising refinery utilization suggests that fuel inventories could rise in the future, meaning further bearish pressure on prices.
Crude opened the week at $76.60 before plummeting day over day. This morning, crude opened at $68.26, a decline of $8.34 or -10.89%.
Diesel didn’t experience as much volatility as crude this week, opening up at $2.7792, although still declining throughout the rest of the week. This morning, diesel opened at $2.6407, a decline of over 13 cents or -4.98%.
Gasoline held steady with diesel this week with despite the uncertain market situation, opening at $2.6459. Throughout the week, gasoline continued to decline and opened this morning at $2.4936, a drop of 15 cents (-5.76%).