The Fed’s Perpetual Energy Inflation Machine?Why Interest Rates Could Send Crude Higher.
Analysis on how the Fed's interest rate policies could exacerbate crude oil supply deficits and fuel inflation, against a backdrop of global economic shifts.
On Today’s Energy Shots:
Weekly Energy Industry News Recap
The Fed’s Perpetual Energy Inflation Machine?
Why Interest Rates Could Send Crude Higher.
Weekly Energy News Recap:
US Rig Counts:
According to Baker Hughes Co, total US rigs fell by seven to 623 in the week ending September 29th.
Here’s how the total breaks down:
US oil rigs declined by five to 502. US gas rigs fell two to 116. “Miscellaneous” rigs held steady at 5.
Weekly EIA Report:
On Wednesday, the EIA’s weekly report showed a larger-than-expected decline in US crude inventories of 2.2 million barrels to 416.3 million.
Stocks at the Cushing, Oklahoma delivery hub fell by 943,000 barrels to under 22 million. Cushing’s inventories are on “red alert,” as the hub’s minimum operating level is 20 million barrels.
Refinery crude runs fell by 239,000 bpd for the week ending 09/22, with refinery utilization rates dropping 2.4% to 89.5% of capacity.
Equinor’s Rosenbank Approval
On Wednesday, Britain approved Equinor’s North Sea Rosenbank oil field project.
The Rosenbank field is expected to produce 300 million barrels over its lifetime.
In response to climate-centric opposition, British officials said Rosenbank would bolster the UK’s energy security while employing electrified extraction technology to reduce emissions.
2022 UK oil output fell to its lowest level since records began.
Equinor says output from the field will start in 2026 or 2027, with electrification processes coming online by 2030 at the earliest.
Provisions in the UK’s Energy Profits Levy (i.e., windfall tax) enacted in 2022 enable oil and gas firms to reduce their tax basis by 91.40 pounds for every 100 pounds invested in new production.
Interior Department Offers Record-Low Auction Schedule
On Friday, the Biden Administration unveiled its five-year auction schedule for offshore drilling rights in the Gulf of Mexico.
The plan set a record for the fewest oil and gas lease sales ever offered, with just three auctions through 2029.
Auctions are scheduled for 2025, 2027, and 2029.
The US Department of the Interior (DOI) said, “These three proposed lease sales are the minimum number that will enable the Interior Department to continue to expand its offshore wind leasing program through 2030.”
Why the minimum?
Provisions in the Inflation Reduction Act supplied by Senator Joe Manchin (D, WV) link the DOI’s ability to expand its offshore wind program to the DOI’s offshore oil and gas auctions.
If the DOI doesn’t offer offshore drilling leases, it can’t offer offshore wind leases either.
Crude’s Weekly Scorecard
ICE Brent Front Month [BRN.1]:
Week High: $97.69 on 09/28
Week Low: $91.80 on 09/26
Friday: – Open $95.07 – Last $95.31 – High $96.26 – Low $94.90 –
WTI Front Month [US:CL.1]:
Week High: $95.03 on 09/28
Week Low: $88.19 on 09/26
Friday: – Open $92.90 – Last $90.79 – High $92.94 – Low $90.35 –
The Fed’s Perpetual Energy Inflation Machine?
Why Interest Rates Could Send Crude Higher
Last week, the US Federal Reserve elected to hold the benchmark federal funds rate steady at 5.25%-5.50%, adding warnings that interest rates will likely remain “higher for longer.”
The linear interpretation of the Fed’s announcement for crude oil prices looks something like this:
“Prolonged high-interest rate environment = headwinds for oil demand = bearish crude.”
But there’s more to the story.
And it’s buried in Fed Reserve Governor Michelle Bowman’s commentary last week.
Three Key Points from Bowman’s Interview:
“Inflation is still too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2% goal in a timely way,"
Fed projections show inflation will remain above the 2% target until at least the end of 2025
Rising energy prices are a key focus for further rate-hike decisions
Fed v. Energy Prices
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