By Barani Krishnan

Investing.com — As it attempts to stop the fuel-fueled inflation that is sweeping through America’s economy, the Federal Reserve insists there will not be a recession. 

It is not due to OPEC or $100-plus crude oil. The main reason the central bank will lose is because of a few U.S. refiners who are determined to maximize profits, while the rest goes to hell in a handbasket. 

To be sure, these refiners, made up of names such as Marathon Petroleum and Valero Energy, aren’t necessarily doing anything that’s illegal — other than goosing returns for their shareholders and companies, which is perfectly natural in a current business cycle like the one in energy. 

To understand it better, there’s a severe squeeze in the supply of gasoline, and particularly diesel, from the closure and downsizing of several refineries during the pandemic. Those who’ve stayed in the business are now milking the situation by providing only what they can — or, more accurately, wish — without putting any of the money they’re making into expanding their plants or acquiring the idled ones that can be reopened to provide some measurable relief to consumers.

Bloomberg has estimated that US oil refining capacities have shut down by more than 1 million barrels per hour since Covid-19, which initially reduced oil demand in 2020. Outside of the United States, capacity has shrunk by 2.13 million additional barrels a day, energy consultancy Turner, Mason & Co says. Bottom line: The squeeze will only get worse with no plans for expansion.

“The oil market is projecting a false sense of stability when it comes to energy inflation,” Bloomberg’s energy analyst Javier Blas wrote in a commentary this week as gasoline reached record highs above $4.50 per gallon at some U.S. pumps while diesel got to an eye-watering peak beyond $6. 

“The real economy is suffering a much stronger price shock than it appears, because fuel prices are rising much faster than crude, and that matters for monetary policy,” Blas said, referring to the problem swelling at the door of the Fed. 

To give some real dollar idea of what he’s talking about, he says: “If you are the owner of an oil refinery, then crude is trading happily just a little above $110 a barrel — expensive, but not extortionate. If you aren’t an oil baron, I have bad news: it’s as if oil is trading somewhere between $150 and $275 a barrel.”

To break it down, U.S. crude’s benchmark grade, the West Texas Intermediate, or WTI, has ranged for weeks at between $95 and $110 per barrel. However, jet fuel futures in New York Harbor trade at an equivalent to $275 Diesel? That’s at $175, while gasoline is around $155. These wholesale prices include taxes, marketing margins and all other costs. These could make it more confusing for consumers. 

It wasn’t always like this, of course. For 35 years at least, the crack spread — the industry term for the profit derived from “cracking” fuel products from crude — was at an average of around $10.50 a barrel. Between the 2004-2008 “golden age of refining”, the spread surpassed $30. The spread reached an all-time high of $55, just last week. 

The gross difference now between crude and refined oil prices is the result of an exacerbated supply deficit coupled with demand that’s almost back to the pre-pandemic highs. Stockpiles of diesel on the East Coast have plummeted to levels similar to those in 1990. The oil distillation capability fell by 1.9million barrels per day in the Middle East and China between the beginning of 2019 and today, the biggest decline in 30 year. Last but not least, global – or at least European – diesel supplies are being choked as well by the West’s sanctions on Russian energy products.

Saudi Arabia’s Energy Minister Abdulaziz bin Salman said last week the OPEC+ alliance of oil exporters under his watch had nothing to do with the U.S. refining crisis. 

“I did warn this was coming back in October,” Abdulaziz said, adding that America wasn’t alone. “Many refineries in the world, especially in Europe and the U.S., have closed over the last few years. The world is running out of energy capacity at all levels.”

This crisis is only going to get worse — in both price and supply. John Catsimatidis, a billionaire owner of a New York City fuel station and refinery, warned last week that diesel rationing is possible on the East Coast. 

Catsimatidis, whose company owns and operates 350 gas stations, however, doesn’t expect gasoline to become scarce, just very expensive. “Drivers will pay the highest gasoline prices ever paid for Memorial Day,” he said, adding that travel during the holiday should surpass numbers seen last year. 

Transporters and truck drivers who use U.S. roads to deliver goods said that they have done all they could to store diesel. However, there is speculation that high prices may cause delays. 

“Demand is not that easily destroyed,” Shell Plc Chief Executive Officer Ben van Beurden told investors last week.

However, some analysts argue that fuel demand must be eliminated at these levels or higher — otherwise, it will impact the economy.

“Concerns over the economy are legitimate and real,” said John Kilduff, partner at New York energy hedge fund Again Capital. “The cost of diesel represents the real economy. At more than $6 a gallon, that’s cutting into the bottom line of companies and we could be on the precipice of a major demand destruction in diesel.”

“Already, there are fewer Amazon trucks on the road making deliveries, while there has been a huge uptick in credit-card spending, showing the consumer is getting rapidly tapped out. It’s all coming home to roost for those long-oil.”

On Thursday, the International Energy Agency warned that rising pump prices and slower economic growth will likely significantly slow down demand recovery throughout the rest of 2019 and 2023. 

Kilduff and other analysts are concerned about how much the Fed will hike rates.

Up to now, the central banks has approved a 25-basis (or quarter point), hike in March and a 50-basis (or half way) increase May. According to money market traders, 83% of the possibility for a 75-basis (or three-quarter) point increase in June is being priced in. Jerome Powell the Fed chairman, however, denied in a Thursday interview that such an increase would occur for June. Citing his preference for continuing with 50-bps rises for at least two additional months, Powell said it was unlikely.

But Powell also said something worrying — achieving a soft landing for the US economy from the Fed’s rate hikes will depend on factors beyond the central bank’s control. Slowing wage growth — a key component of inflation now — won’t be easy, he said. “It’s quite challenging to accomplish that right now, for a couple of reasons. One is just that unemployment is very, very low, the labor market’s extremely tight, and inflation is very high.”

After contracting 3.5% by 2020, due to the disruptions caused the pandemic, America’s economy grew by 5.7% in 2021. This is the highest growth rate since 1982.

The inflation rate has risen just as quickly as the economy. Or maybe even faster. An inflation indicator closely tracked by the Fed, the grew by 5.8% in December, and 6.6% over March. The readings were the highest since the 1980s. Both the and the were two key indicators of inflation that rose in April by 8.3% & 11% respectively. 

The Fed’s own tolerance for inflation is just 2% per year. Powell has indicated that a total of seven rate hikes — the maximum allowable under the central bank’s calendar of meetings this year — were on slot for 2022. He said that more rate adjustments may be made in 2023 until the inflation target of 2% is reached.

“My fear is that the Fed might overdo it,” said Kilduff. “With the Covid-related physical stimulus already abandoned by the federal government, there will be a lot less liquidity in the system in the coming months. If the Fed brings an ax to the system via excessive rate hikes, we might end up chopping up entire arteries of the economy.”

Blas, Bloomberg shares his concern about the impending train wreck for America’s economy.

“The longer the refiners make super-profits, the harder the energy shock will hit the economy,” he said. “The only solution is to lower demand. For that, however, a recession will be necessary.” 

Oil: Weekly Settlements & WTI Technical Outlook

London-traded ​​, the global benchmark for crude, settled at $111.22 a barrel, up $3.77, or 3.5%, on the day on Friday. The week was down 0.7%. 

Brent rallied after reports from China that China could ease down on Shanghai’s coronavirus lockdown. Shanghai has experienced limited economic activity in the seven past weeks due to strict movement restraints.

Gains in Brent were, however, capped by the European Union’s continued delay in reaching consensus for a ban on Russian oil, particularly after resistance from Hungary, which fears finding itself in an energy crisis without supplies from Moscow.

New York-traded WTI (the benchmark U.S. crude oil) settled at $110.16, an increase of $4.03 or 3.8%. It rose 0.7% for the week.

WTI rose on an apparent cut in U.S. crude oil refining capacity. It has driven pump prices for fuel up to new records this week with diesel hitting all-time highs over $6 per gallon, and gasoline at record highs well above $4.50.

The divergence between Brent and WTI is “a story of two oils”, said Kilduff.

“The holdout on a European embargo of Russian oil, particularly by Hungary, is limiting Brent’s upside, while WTI is basking in bullish glory from the refining crunch in fuels that’s sent U.S. pump prices to record highs,” he added.

As for WTI’s technical outlook, the weekly settlement at just above $110 indicated that oil bulls were positioned for the next leg higher at between $116 and $121, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“So far, $98 has proven to be hard floor, while $104-$106 keeps the momentum up,” Dixit said. “Volatility-induced mild consolidation from $106 to $104 will attract more buyers, while weakness below $104 will press oil towards $101 – $99.”

The bullish momentum will be weakened if the price falls below $98, according to him. “That can trigger a correction of $18 – $20, exposing WTI to $88 and $75 in the mid-term.”

Gold: Weekly Market Activity & Technical Outlook

All that glitters isn’t gold, is the saying. The yellow metal is still barely shining these days. 

In Friday’s session, gold plunged briefly beneath the key $1,800 level on New York’s Comex, accelerating a selloff that began in mid-April.

Although it did recapture that level after finding support in $1,700 territory, it wasn’t enough to undo the damage from earlier in the week that left it on the path to a fourth straight weekly loss that’s dinged roughly $165, or 8%, from its value since the week ended April 8.

Gold’s tumble on Friday, as in recent days, came on the back of a resurgent dollar, which scaled fresh 20-year highs. After peaking at 105.5 earlier in the morning, the, which compares six major currencies, fell to an intraday low of 104.5. 

This helped gold to recover some of its losses but it did little to affect its directional charge. Dollar analysts expect new 2-decade highs from the dollar in coming days as they speculate about the Federal Reserve’s hawkishness with regard the next U.S. rates hike.

“Only a sudden U.S. dollar sell-off is likely to change the bearish technical outlook” of gold, said Jeffrey Halley, who oversees Asia-Pacific markets’ research for online trading platform OANDA.

Comex ended at $1.810.30 per troy ounce. That’s a decrease of $14.30 (or 0.78%) on the previous day. Session low: $1,797.45 — lowest level since Jan. 30, 2009. The week-to-date decline in June gold was 4%.

Despite Friday’s rebound from the lows, gold could revisit $1,700 territory if it fails to clear a string of resistance from $1,836 to $1,885, according to Dixit of skcharting.com.

“Since the current trend has turned bearish, sellers are very likely to come at the test of these resistance areas,” said Dixit, who uses the for his analysis. 

“As gold has turned bearish short term, bearish pressures will attempt for $1,800 and then $1,780 – $1,760. A decisive close above the range can extend the recovery to $1,880, failing which bearish pressures will push gold down to $1800 – $1780, and extend the decline to $1,760 in the week ahead.”

He added that gold can be recovered if it breaks or sustains over $1,848, but not $1,885 or $1,900.

Disclaimer:Barani Krishnan is not a shareholder in any of the securities or commodities he discusses.