Recessionary Questions Remain
June 20, 2023
Written By Tim Danze
Recession, recession, recession. I have been thinking and writing about this for years now. Have we already had one? Are we in one now? Are we going to have one? These are important questions, and if you ask around, you could find someone who thinks the answer is yes to all three possibilities. Recessionary questions remain a huge factor for predicting where energy prices are headed. A recession would lower energy demand and, in turn, help replenish inventories while putting pressure on prices to move lower. From a bullish perspective, if there is a mild recession, or no recession, and demand stays strong, then inventories will get tighter, and prices will go higher.
Conflicting energy demand reports make it difficult to get a clear reading of whether the economy is struggling or not. In a recent column for Reuters news, market analyst John Kemp said, “Consumption of distillate fuel oil remains subdued as a result of the widespread downturn in manufacturing and freight activity since the third quarter of 2022. Consumption and production have increased by a similar amount since the start of March, an indication of little change in the domestic balance.”
However, in a recent earnings call, oil refiner Valero said that petroleum demand is strong with gasoline sales up 16% year-over-year and diesel sales up 25% year-over-year. In its monthly report, the U.S. Energy Information Administration said petroleum demand hit its highest level in April 2023 since November 2022, and U.S. oil production fell in April 2023 to its lowest level since December 2022.
Chinese demand is another wild card, and reporting about China’s appetite for oil has been muddled. One report will say demand is strong as the country emerges from strict COVID-19 restrictions; another report will paint a less optimistic view. Market watchers will continue to pay close attention to this situation because strong demand from China will be supportive of prices.
Trading on the New York Mercantile Exchange (NYMEX) for ultra-low sulfur diesel (ULSD) futures had a COVID-19 recovery high of $5.8595 on April 25, 2022. The recent low price as of late May was in the $2.15 area. That is a decline of almost $3.70, which is a significant price correction. If you consider the high from Oct. 24, 2022, at $4.5498 to that $2.15 level, you still have more than a $2.30 move. Either way, ULSD futures have come down substantially. Is this the result of recession fears or a truly poor economy? If we do see a recession, do prices go lower, or has the market already priced that into account? We’re left with many questions, no clear answers and varying opinions.
My hunch is that the markets will get a dose of reality in the medium term, and we are likely to see a correction lower. When might this play out? That again is a matter of opinion. If you believe a recession is coming to pull markets back, you risk it running higher due to low inventories. At the same time, if you jump into the market now to lock in some fixed-price gallons, you could see the economy take a turn for the worse and prices move lower. The current values for forward prices have moved lower over the last four to five months and look much more reasonable. With all the current uncertainty around the debt ceiling, banking crisis, murky economic outlook and depleted inventory levels, this market is likely to congest over the next month or two, looking for clarity on any and all of these issues.
Most people have already made decisions for the current season, so my advice would be to look ahead to next spring and use the current move off of recent highs to book gallons for your 2024 needs.