Oil prices are getting rattled as the fear that rising interest rates will slow down surging U.S. and global demand. High yielding auctions and Fed minutes, that stated the obvious, was enough to send stocks and oil and the ten-year note on a wild ride. At first, the market took the Feds promise of gradual rate increases as a positive but later deemed that the Fed was still hawkish. Yet, the real surprise is that the market is surprised that the Fed can read economic data.

The Fed did seem to dismiss the recent jump in inflation as temporary and said it felt it would level out around their target of 2%. That is a goal the Fed has been trying to achieve for some time. They also said that while wages have improved they are still not seeing a broad-based pickup in wage growth. In other words, the fear that the Fed needs to get to aggressive or thoughts that they have fallen behind the rate curve remains to be seen. In fact, some Fed officials say they still see slack in the labor market.

So, really the market’s reaction at first was positive for stocks but rising yields as so-so auctions of a record amount of Fed supply freaked traders out. Yet, the Fed stressed again and again that rate hikes would be gradual, so it is likely that despite the spike and reversal on stocks we will probably reverse and rally again, then break, then rally. In other words, enjoy the volatility. Position traders buy the break as we should end the volatility with a test of stock market highs within 2 months.

Oil prices are caught up in the yield curve, dollar, and stock market madness and almost ignored a very bullish American Petroleum Institute (API)weekly supply report. The API reported that crude supply fell by 907,000 barrels last week at a time of year when they should be rising. As we move deeper into the shoulder season, a draw should give oil bears some worries. We also saw another 2.644-million-barrel draw in the Cushing Oklahoma delivery point which is adding support to the WTI delivery point and helping to close the spread with the Brent crude.

Products were also bullish, led by a whopping 3.563 million barrels drop in distillate and a 1.644-million-barrel build in gasoline. The data suggests that we are still seeing exceptional demand despite stock market roller coaster rides. If this strong demand is any indication we should see prices really start to move higher after we start the long road out of maintenance. We get the Energy Information Administration version today and if it matches up with the API we should see a big rally, assuming the stock market and the dollar is behaving.

The trade will also keep an eye on U.S. production data that has surged. Yet, as production is surging, so are costs. Talks about frac sand shortages and labor shortages are adding some challenges to the shale space.

U.S. crude inventories have fallen by 113 million barrels from their peak in late March 2017 and it would have been by a lot more if there were not significant releases from the U.S. Strategic Petroleum Reserve. The EIA now is reporting that “Recent legislation has directed the sale of more than 100 million barrels of oil from the U.S. Strategic Petroleum Reserve (SPR) in U.S. government fiscal years (FY) 2022 through 2027. Based on legislated sales established in multiple acts of Congress, the SPR could decline by about 40% in the coming decade while still meeting requirements for petroleum import coverage. Assuming no other legislation over this period, the SPR could decline from 695 million barrels at the start of 2017 to about 410 million barrels at the start of 2028. The largest stockpile of government-owned emergency crude oil in the world, the SPR was established to help alleviate the effects of unexpected oil supply reductions. Located in four storage sites along the Gulf of Mexico, the SPR held more than 695 million barrels of crude oil at the beginning of 2017, or about 97% of its 713.5-million-barrel design capacity. 

Because of the Holiday, we will also get the EIA natural gas report today. Nat gas should see a 120bcf draw and really needs a bullish draw to support this market. Despite winters best efforts to support natural gas this year, record U.S. production is capping this market out. This may be the last hurrah for the bulls before a spring time price swoon. It is closer to spring then you think.