⚡ Energized - Oil prices pause, EIA reaffirms weak outlook

Energy Markets

🛢️Oil prices took a pause as the market assesses just how far these sanctions will go to disrupt oil supplies and weigh against the fact that OPEC has the capacity to fill in any lost barrels.

The EIA's latest ​Short Term Energy Outlook​, released yesterday, reinforced their view that the market will remain oversupplied through 2025 and 2026, noting:

"We forecast that the Brent crude oil price will average $74 per barrel (b) in 2025, 8% less than in 2024, and then continue fall another 11% to $66/b in 2026."

They did emphasize that the estimates were calculated before news of the sanctions was released.

The EIA releases crude inventory data later today.

Even before sanctions were announced, oil producers are selling into the recent rally. Risk management firm AEGIS stated that ​hedging activity hit a record​ on Jan 10.

WTI Spreads

Feb/Mar: +1.13

Mar/Dec: +5.29

Dec25/Dec26: +3.06

🔥Natural gas prices were weak in the morning before an afternoon rally finished positive by .9%.

Cold weather persists, but some are calling for a warmer February. Still expecting a big draw in from the EIA tomorrow. Have to get through this expiration first!

An Orderly Market

Yesterday, I linked to a story in the Headlines section that many may have skipped. After all, what does the nickel trading have to do with energy markets?

The story is really more about orderly markets, and how they can unravel. In the case of LME nickel, it was a situation where inventories held by the exchange got to low levels that was the market's temporary undoing.

As the ​story in Reuters​ put it:

"The LME's nickel crisis was compounded by low stocks and the lack of physical delivery options available to big short position holders such as China's Tsingshan Group."

What happended then? Well, prices shot from $20k to $45k and then global markets froze. No trading, no pricing.

Well, with today's inventory data on its way, it's worth considering a story we talked about last week that WTI inventories at Cushing are at a 10-year low. For all the talk of a future supply overhang globally, the ability to deliver on short contracts in the near term doesn't wait for that future supply to hit the market (hence that Mar/Dec spread being over $5).

Will this be a problem? Most market watchers think not. And ​open interest​ in the front month contract is falling rapidly. But it's something to watch.

As Scott Shelton, an energy specialist at ICAP ​puts it​:

“It has implications, so you can’t ignore it,”

Contracts, Not Shares

Sometimes we forget the price on the screen has physical barrels behind it, and that companies use them to manage physical supply. During the pandemic, prices went negative on a contract expiry.

The Feb WTI contract expires Jan 21.

Headlines

"It's really important because we don't want two million Chinese cars on the road and then realize ... we have a threat,"

+​Biden administration finalizes US crackdown on Chinese vehicles​ - Reuters

"Line 1 moves around 1.5 million barrels of gasoline each day from Houston, Texas, to storage tanks in Greensboro, North Carolina, from where it is distributed locally or pumped to other Northeastern markets all the way to the New York Harbor."

+​Colonial Pipeline shuts main gasoline artery after potential gasoline spill​ - Reuters

"They have been rewriting mining laws, demanding higher tax payments and larger ownership stakes in the industry, but have also resorted to restricting operations, issuing arrest warrants and detaining employees."

+​The ‘terrifying’ crackdown on mining companies in Africa’s coup belt​ - FT

"The order calls for leasing federal sites owned by Defense and Energy departments to host gigawatt-scale AI data centers and new clean power facilities - to address enormous power needs on a short time frame."

+​Biden signs executive order to ensure power for AI data centers​ - Reuters

Economic Calendar

Monday -

Tuesday - PPI, Beige book

Wednesday - CPI, ​Weekly Crude Oil Storage Report​,

Thursday - ​Weekly Natural Gas Storage Report​, Jobless Claims, Retail sales

Friday - Housing starts, Cap u