Inflation Fears Seem To Be Taking Credit For The Selloff In Both Energy And Equity Markets
After a soft finish Monday, energy futures have moved modestly lower again this morning after another failed rally attempt overnight. Inflation fears seem to be taking credit for the selloff in both energy and equity markets as the last meeting of the year for the FOMC has investors suddenly seeming nervous.
A lot has changed in the past month as the FED seems to have changed its stance while inflation continues to hit new 40 year highs and unemployment has dropped sharply. While almost no-one expects a rate increase at this meeting, the CME’s FEDWATCH tool shows that a majority now expect at least one rate increase by May, whereas a month ago only 1/3 expected to see an increase by then. While so far the FED’s pivot hasn’t had a big impact on equity or energy values, there’s a case to be made that a hawkish FED is reason to sell any rallies, whereas over most of the past two years a money printing FED was a reason to buy any dips.
Speaking of which, futures sold off sharply in the 2 minutes following the release of the PPI reading for November that showed producer prices have climbed 9.6% over the past 12 months, a record high for that reading, which will no doubt catch the attention of the FOMC, and provide another data point for those that want to tighten up monetary policy.
The FED meeting seems to be overshadowing the monthly data deluge from the alphabet soup of oil market reporting groups.
OPEC’s monthly oil market report was highlighted by a forecast that Omicron is, “…expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges.” The report did shift the growth estimates originally marked for Q4 2021 to Q1 2022, but kept the overall demand estimates for next year unchanged.
The IEA’s monthly oil market report took a more bearish tone, reducing its demand estimates for both 2021 and 2022 due to restrictions on international travel caused by the surge in COVID cases, and projecting that global supplies are set to outpace that demand starting in December. The report highlights the recovery in US oil production as a leading cause for the supply increases, and notes that the world’s 3 largest producers could all reach record levels next year.
Bothe the OPEC and IEA reports highlighted an increase in global refinery runs over the past few months, and note that Omicron is likely to hurt those refinery margins as facilities will once again have to get creative to find a home for their excess jet fuel.
The EIA’s monthly drilling report is projecting that both oil and gas production in the Permian basin will reach record highs in January, while none of the other major US shale basins is even close to recovering to pre-COVID production levels. This article on the boom in export facilities along the gulf coast offers a look into why the focus remains on the Permian, and into the efforts to try and prevent those export facilities from being built.
RIN markets continue to struggle to digest the changes to the RFS program announced last week. D6 ethanol RINs remain the most volatile, dropping 20 cents before the announcements, then rallying 40 cents after the announcements, only to drop 20 cents over the past 2 days. D4 RINs meanwhile have a large backwardation, with 2021 values trading some 20 cents above 2022 values.
The EPA this morning published a notice of opportunity to comment on their proposed denial of all petitions for small refinery waivers to the RFS, which claimed that since all market participants face the same RIN prices, no disproportionate economic hardship exists for those smaller plants. Assuming the proposal sticks, that would add roughly 4.5 billion RINs to the total obligated amount needed over the past 3 years.
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