U.S. Interest Rates Likely to Remain Elevated for Years to Come
- Federal Reserve implements fifth rate hike this year
- Rate rises despite Fed’s own concerns about recession
- Funds rate expected to remain elevated at 2.9% in 2025
- Natural gas storage is 3% lower than the five-year average.
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The Matrix
A three-quarters-of-one-percent increase in the Fed Funds rate – the third such increase this year – was announced on Wednesday, September 21. The impact on costs paid for credit by consumers for goods and services of all kinds could be substantial.
The Federal Reserve’s concern for the effects of inflation is so strong that Fed Chairman Jerome Powell conceded the economic pain of five rate increases this year. “No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” he said.
Economic data are starting to reflect that hardship. The Federal Reserve’s own projections anticipate unemployment at 4.4% in 2023, well above 3.7%, the current rate. Gross Domestic Product for the U.S. was put at 0.2% for the third quarter, down from 1.7% estimated in June.
The Federal funds rate, according to the Fed’s projections, is likely to stay high for some years to come. Forward estimates have been raised significantly. “The median federal funds rate projection was revised upwards for 2022 to 4.4% from 3.4% in June. That number rises to 4.6% from 3.8% for 2023. The rate was also revised higher for 2024 to 3.9% from 3.4% in June and is expected to remain elevated at 2.9% in 2025,” according to press reports.
The effect on oil markets was inconclusive. Spot prices for energy futures were quiet after the rate gain was announced. ULSD charts showed dojis – candlesticks that indicate uncertainty.
And that’s where we are as the winter approaches. Inventories remain tight but showing some signs of easing. Domestic demand starting to fail.
Oil’s next move depends on an array of possibilities from governmental policies to more-and-more extreme impacts of climate.
Supply/Demand Balances
Supply/demand data in the United States for the week ended September 16, 2022, were released by the Energy Information Administration.
Total commercial stocks of petroleum rose 9.2 million barrels during the week ended September 16, 2022.
Commercial crude oil supplies in the United States increased by 1.1 million barrels from the previous report week to 430.8 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Plus 0.1 million barrels to 8.4 million barrels
PADD 2: Down 0.9 million barrels to 106.9 million barrels
PADD 3: Plus 2.2 million barrels to 244.7 million barrels
PADD 4: Plus 0.3 at 23.1 million barrels
PADD 5: Down 0.7 million barrels to 47.5 million barrels
Cushing, Oklahoma, inventories were up 0.4 million barrels from the previous report week to 25.0 million barrels.
Domestic crude oil production was up unchanged barrels per day from the previous report week at 12.1 million barrels daily.
Crude oil imports averaged 6.947 million barrels per day, a daily increase of 1,155,000 barrels. Exports increased 25,000 barrels daily to 3.540 million barrels per day.
Refineries used 93.6% of capacity; 2.1 percentage points higher than the previous report week.
Crude oil inputs to refineries increased 333,000 barrels daily; there were 16.355 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 377,000 barrels daily to 16.793 million barrels daily.
Total petroleum product inventories rose by 8.1 million barrels from the previous report week, rising to 809.1 million barrels.
Total product demand decreased 376,000 barrels daily to 18.938 million barrels per day.
Gasoline stocks increased 1.6 million barrels from the previous report week; total stocks are 214.6 million barrels.
Demand for gasoline fell 172,000 barrels per day to 8.322 million barrels per day.
Distillate fuel oil stocks increased 1.3 million barrels from the previous report week; distillate stocks are at 117.3 million barrels. EIA reported national distillate demand at 3.409 million barrels per day during the report week, an increase of 277,000 barrels daily.
Propane stocks increased by 3.3 million barrels from the previous report week to 81.2 million barrels. The report estimated current demand at 852,000 barrels per day, an increase of 337,000 barrels daily from the previous report week.
Natural Gas
Domestic supplies of natural gas rose only modestly above the five-year minimum level as reported by the EIA’s Natural Gas Weekly Update for the week ended September 21.
Imports of LNG have been falling recently, contributing to the short supply situation. EIA notes, “In the first six months of 2022, U.S. liquefied natural gas (LNG) imports reached their lowest level in at least 15 years, averaging 77 million cubic feet per day (MMcf/d), compared with the five-year (2017–2021) average for the same period of 174 MMcf/d. “
LNG imports have taken a smaller share of natural gas imports over the past several years. They comprised nearly 17% of imports in 2007; LNG now comprises less than 1%.
This reflects the expansion of LNG export facilities along the Gulf Coast and the conversion of LNG import stations to export status. Domestic production rose too as shale drilling gained in importance, to the detriment of LNG imports.
Almost all LNG imports are now used in New England during winter. The spate of new pipelines connecting production to urban centers largely overlooked New England. When demand is high, overseas LNG can comprise 35% of New England’s needs.
An unexpectedly large injection of natural gas into underground storage, reported last week, led to a sharp drop in spot futures of about a dollar following the report. This broke support at $7.46 and opens the door to lower levels. Next major support is at $5.52.
According to the EIA:
Net [natural gas] injections into storage totaled 103 Bcf for the week ended September 16, compared with the five-year (2017–2021) average net injections of 81 Bcf and last year’s net injections of 77 Bcf during the same week. Working natural gas stocks totaled 2,874 Bcf, which is 332 Bcf (10%) lower than the five-year average and 197 Bcf (6%) lower than last year at this time.
The average rate of injections into storage is 3% lower than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 9.7 Bcf/d for the remainder of the refill season, the total inventory would be 3,313 Bcf on October 31, which is 332 Bcf lower than the five-year average of 3,645 Bcf for that time of year.
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