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Phil Flynn

Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665

Iran and China are opening, taunting the Biden administration as it openly flaunts oil sanctions on Iran even as Iran raises its enrichment of uranium. Both China and Iran seem to think that the Biden administration will be too weak to call them out on these flagrant violations of U.S. sanctions. Under President Trump, they were not as bold. China did try to sneak in Iranian oil but was called out by the Trump administration and that slowed and stopped almost all of China’s illicit oil imports. Yet China and Iran think that now it is business as usual because there will be no consequences from the Biden administration  that is begging Iran to rejoin the flawed Iranian nuclear deal. The money Iran is getting is also empowering them to continue its military excursions in the Middle East and raising the risks of a conflict with Israel and Saudi Arabia.

Bloomberg News reported that, “China is gorging on sanctioned Iranian oil — with imports forecast to more than double this month from February — as other countries hold off purchases for fear of incurring the wrath of the U.S.” So what they are saying is that Iran and China are not worried about the Biden adminstration’s wrath. Chinese imports of Iranian crude will increase to 856,000 barrels a day in March, the most in almost two years and up 129% from last month, according to Kevin Wright, a Singapore-based analyst with Kpler. His estimates include oil that’s undergone ship-to-ship transfers in the Middle East or waters off Singapore, Malaysia, and Indonesia to obscure their origin.”

Israel is signaling that if Iran does not reverse their nuclear ambitions they may be forced to act militarily and over the weekend Saudi Arabia was attacked by an Iranian-backed Houthi rebel that made a failed drone attack on a Saudi oil terminal, the largest in the world. Iran seems to be getting out of the corner that the Trump administration put them in. This is adding to the risk premium for oil. All oil traders know that the higher price for oil, the higher price for products. Oil economics 101.

The other driving force in the upward move in oil prices is OPEC plus production cuts. The Biden administration, unlike the Trump administration, has been silent on OPEC Plus aggressive production cuts. We all remember that President Trump got OPEC Plus to reverse course on production cuts causing oil and gasoline prices to plummet. Who says that Presidents can’t have some impact on gasoline prices?

OPEC plus is now emboldened and according to International Oil Daily, “Saudi Arabia enabled Opec-plus to post the highest compliance rate so far with the oil production cuts it began implementing last May. The Saudis lowered their production by 979,000 barrels per day in February — roughly in line with their pledge to make an additional unilateral cut of 1 million b/d — according to Energy Intelligence’s assessment. That enabled the Opec-plus producer alliance to reach its best-yet compliance rate of 112% for the month. February was also the first month that Russia — the group’s other heavyweight producer — played by the rules, falling short of its 9.184 million b/d output ceiling by 14,000 b/d and giving it a compliance rate of 101% for the month. As a result of the unilateral Saudi reduction, Russia produced 1.03 million b/d more than the Saudis in February, even though the two had started the implementation of the agreement from an identical base of 11 million b/d and with an equal output cut of 1.88 million b/d.

While oil prices whipsawed after the Energy Information Administration (EIA) status report at the end of the day it was impossible to ignore the underlying bullish fundamentals of the market. U.S. refinery runs are recovering very slowly from the Texas power outages as oil refinery inputs averaged 12.3 million barrels up 2.4 million barrels per day more than the previous week’s average. Refineries operated at 69.0% of their operable capacity last week.

Weak oil runs and a jump in U.S. oil production to 10.5 million barrels a day led to a massive 13.8 million barrel crude oil build. Yet with another jump in U.S. gasoline demand and distillate demand was offset by major drops in petroleum products.

The EIA said that total motor gasoline inventories decreased by 11.9 million barrels last week and are about 6% below the five-year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 5.5 million barrels last week and are about 4% below the five-year average for this time of year. ready to use ‘gasoline’ stocks fell 8.8 million barrels while gasoline demand increased by 762,00 barrels a day. Distillate demand was up 354,000 barrels a day.

Today we get the natural gas report. Dan Molinski at the Wall Street Journal says that, “U.S. government natural-gas data due Thursday are expected to show inventories decreased last week by less than normal for this time of year due to mild weather that weakened demand. The Energy Information Administration is expected to report gas-storage levels fell by 78 billion cubic feet during the week ended March 5, according to the average forecast of 14 analysts, brokers, and traders surveyed by The Wall Street Journal. The EIA is scheduled to release its natural-gas storage data for the week at 10:30 a.m. ET Thursday.

Estimates range from decreases of 65 bcf to 86 bcf. The average forecast compares with a 72-bcf decrease in storage in the same week last year and a five-year average decline of 89 bcf for that week. A 78-bcf decrease last week would mean gas stocks totaled 1.767 trillion cubic feet, 14% below last year’s total at this time and 9% below the five-year average for this time of year.

December and January saw a mix of warm and cold spurts that kept in check a long-running storage surplus compared with the five-year average. But a much colder-than-normal February caused demand to rise and supply to temporarily fall, which caused the storage surplus to vanish and become a deficit.

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Phil Flynn

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