In recent years, oil price spikes, that were potentially harmful to the global economy, were thwarted by U.S. shale producers. Yet for a multitude of reasons, this time the global economy might not be so lucky. The Biden administration attacks on energy are drying up investment in the shale patch and while oil rig counts are rising, they are not moving fast enough to fill the coming supply gap. With the lag time to bring on production and the massive retracement in global supply, the oil markets are screaming for more production. Saudi Arabia is going to drastically cut production. This move by the Saudis will go unchallenged by the Biden administration because they favor higher oil and gasoline prices. Biden needs oil and gasoline to be so expensive so alternative fuels have a shot to compete.

John Kemp at Reuters also is warning about a supply squeeze. He points out that global petroleum stocks have fallen by almost 600 million barrels since May 2020, after rising by over 1.2 billion barrels in the previous five months as a result of the epidemic and lockdowns. He says that stocks are expected to decline by a further 140 million barrels over the rest of the year, according to estimates prepared last month by the U.S. Energy Information Administration. Kemp reports that inventories are likely to end 2021 several hundred million barrels above the level at the end of 2019 before coronavirus struck, but that was a relatively tight baseline against which to measure stock levels. Kemp says that the expected production shortfall in the rest of this year and inventory drawdown, has already been reflected in the sharp rise in front-month futures prices and the shift in calendar spreads into a significant backwardation. Kemp warns that the rapid escalation in spot prices and tightening in spreads is consistent with a market climb towards a cyclical peak and signaling the need for more output to relieve expected future shortfalls.

More than likely we will see the production by OPEC increase when they feel that they can extract the most money out of the global economy without tipping it into a major recession. They will not have to fear a checkmate by U.S. shale as more restrictive policies will allow OPEC Plus to regain market share that was lost to us over the last few years.

Shale of course has had other issues than the Biden administration climate agenda. The covid crash in demand showed that the industry did not control costs in the quest to raise output and cash flow. Tsvetana Paraskova of OIL PRICE writes, ”U.S. oil companies are a motley bunch of large publicly traded corporations and small privately held firms are not making the industry’s pitch to regain investor confidence easier, either. The bigger listed firms continue to vow discipline and sustainable production growth, while some private companies are set to continue outspending cash flows to boost production at these higher oil prices. Considering that U.S. producers are not a coordinated bunch of market players like OPEC, investors are only cautiously optimistic that the 2020 downturn may have resulted in a lasting strategic reset of priorities for the shale patch. Investors want to believe that this time profitability, not production, will inform spending decisions at most companies. The industry, for its part, wants to convince the market that it has finally learned its lesson and has a way to win investors over again. Investors and the market have not rewarded U.S. shale for its record production growth in recent years, and they will punish the stocks again if they do not ‘see the money.”

Yet investors also avoid shale because they will be shamed by their peers that view oil and gas as an existential threat because of climate change. Just recently the New York Common Retirement Fund that had invested as much as $12 billion in oil and gas companies in the past, now will pull its $226 billion pension fund out of the “riskiest” oil and gas companies by 2025. Other banks and pension funds are pulling back from oil and gas.

Biden for his part says that America is back, and American diplomacy is back. Yet if his diplomatic efforts are anything like the diplomatic forays of the Obama administration, he might as well have said that America’s failure is back and that failures lead to more upside risk for oil and gas. That may sound a bit harsh but most historians, even President Obama supporters, acknowledge that his administration endured one diplomatic failure after another. Oil and gas traders will remember his failed diplomatic talks with Iraq to keep U.S. troops in the country.

That led to the rise of ISIS leading to war breaking out in the Iraqi provinces and allowed the terror group to take over some Iraqi oil fields. You might argue that Obama did not try too hard to convince Iraq to allow U.S. troops to remain, but the failure led to years of fighting and instability in the county that U.S. troops had finally had under control. He bungled the Syrian civil war. The Atlantic wrote hating August 2012, Obama was asked about what could lead him to use military force in Syria. “We have been very clear to the Assad regime,” he said, “that a red line for us is we start seeing a whole bunch of chemical weapons moving around or being utilized. That would change my calculus.” We had received reports about a month earlier that the regime was preparing to use chemical weapons against the opposition or transfer them to the terrorist organization Hezbollah. We issued private warnings to Iran, Russia, and the Syrian government; Obama made clear publicly to Assad that the world was watching, and that Assad would be held accountable by the international community should he use those weapons. Yet when U.S. intelligence said that Assad used the weapons, Obama blinked. Climate Czar and all our allies were ready to attack when Obama called off the war. Military experts now believe that had Obama acted, it would have brought down Assad and ended the war, instead of its emboldened Russia that went on to meddle in U.S. elections.

Obama also failed in diplomacy with Russia to stop Russia’s incursion into the Reran. That increased Putin’s Power allowed him to secure Ukraine’s energy supply and pipelines.

It failed in Libya when they intervene in Libya. The BBC reported that U.S. President Barack Obama has said failing to prepare for the aftermath of the ousting of Libyan leader Col Muammar Gaddafi was the worst mistake of his presidency. Mr. Obama was answering a series of questions on the highs and lows of his time in office on Fox News. He said, however, that intervening in Libya had been, “the right thing to do”. The U.S. and other countries carried out strikes designed to protect civilians during the 2011 uprising. But after the former Libyan leader was killed, Libya plunged into chaos with militias taking over and two rival parliaments and governments forming. The Islamic State (IS) gained a foothold, and Libya became a major departure point for migrants trying to reach Europe.

Obama help foster a war in Yemen that is raging to this day and caused real strife in the Middle East. The Atlantic wrote that on March 26, 2015, Saudi Arabia and the United Arab Emirates launched a surprise military attack on Yemen, destroying its air force and controlling its airspace within 24 hours. The Saudi-led coalition was backed by Western allies including the United States, the United Kingdom, and France. Hours after the intervention began, the Obama administration released a statement declaring, “In support of GCC [Gulf Cooperation Council] actions to defend against Houthi violence, President Obama has authorized the provision of logistical and intelligence support to GCC-led military operations.” The GCC is a political alliance that includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. While the statement emphasized, “U.S. forces are not taking direct military action in Yemen,” it noted the creation of a, “Joint Planning Cell with Saudi Arabia to coordinate U.S. military and intelligence support.” Obama initiated yet another unauthorized U.S. military foreign intervention without approval from Congress, thereby violating the War Powers Act of 1973, which authorizes Congress — not the president — to initiate war.

In the days, months, and years that followed, it became apparent that U.S. military support for the Saudis and Emiratis was much more substantial than stated, and unwavering despite mounting evidence of war crimes committed by the coalition. Under Obama, the United States supplied arms to the coalition, helped identify bomb targets, and provided mid-air refueling of Saudi and UAE warplanes. But the United States also provided political cover for the war, shielding Saudi Arabia from scrutiny at the United Nations and persistently proclaiming the strength of the U.S.-Saudi alliance.

Obama’s support persisted as millions more in Yemen faced hunger as a result of the blockade, and photographs of children’s emaciated bodies began to surface. It continued even after hospitals — including those operated by Médecins Sans Frontiers — were repeatedly bombed despite prior knowledge of their coordinates. It continued despite large-scale bombings that caused mass civilian casualties, including the Hajjah market airstrike that killed 119 people in March 2016, and the October 2016 bombing that killed 140 mourners attending a funeral in Sana’a. The Obama administration’s support also continued when evidence surfaced that the Saudis and Emiratis were working alongside America’s foremost enemy, al Qaeda.

The Iran nuclear deal was also a failure. It gave Iran money to spread its war errors in the Middle East and failed to reduce the chances that Iran could get a nuclear weapon.

I could go on with the diplomatic failures but let us focus on what they say was an achievement, the Paris Climate Accord. This is a diplomatic mess as it fails to adequately reduce carbon emissions and puts an excessive burden on the U.S.. So if that is diplomacy, then I will take the bluster and blow. If you’re not hedged, time to do so.

Of course, this is all bullish for oil and gas. Natural gas broke out as cold descends and the long-term production destruction is happening. Blocking of pipelines and infrastructure will add to the cost on the backend.

Thanks,
Phil Flynn
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