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
The global elites are starting to find out that the ridiculous steps they have taken to fight climate change are backfiring and their cure is worse than the disease. The global energy crisis becoming more pronounced, and the globe-saving do-gooders now have set the stage on a path of huge economic risk and the potential for more political instability. The Lack of Cap X spending on fossil fuels as we warned is causing shortages. Agencies like The International Energy Agency (IEA) that incorrectly predicted surging oil demand now have left the markets short of supply. As I wrote back on March 17 “the IEA has declared that a “supercycle” in oil demand is unlikely while admitting that the agency underestimated demand in their last report. The IEA has had a long track record of underestimating demand. They also say that oil demand may not return to pre-covid levels for 2 years and warned that some of the covid oil demand destruction may be permanent.” I thought on a holiday trade day it might be nice to take a look back.
The Biden Administration also owns this crisis because it was the U.S. producer that kept global prices under control. As I Wrote January 2Oth In a report called “ A New Day in America” I said….It is a new day for America as Joe Biden becomes president and for the crude oil market, the outlook under his administration is very bullish. The disdain for fossil fuels and worshiping at the altar of climate change will restrict U.S. supply and cause prices to rise. The incoming president has already signaled that on his first day in office he will sign executive orders to revoke the permit for Canada to build the Keystone XL pipeline and rejoin the Paris Climate Accord and put a temporary moratorium on oil leasing in the Arctic refuge. Oil prices are responding, moving higher even as the dollar starts to rise. The era of higher oil and gasoline prices are here and Americans can look forward to higher prices at the pump.”
I also wrote on January 15th that “With President Joe Biden coming in, it appears fossil fuels are on their way out. In one of the most substantial threats to the global economic recovery. Biden’s war on fossil fuels is already having an impact on oil prices and the threat is increasing as more banks are boycotting investment in fossil fuel projects which will cause higher oil and gas prices and be a drag on US economic growth. Yet is it a good policy or even legal that banks can conspire as a group to try to force an industry to go bankrupt? That may be a question for legal scholars but the Trump Administration sees it as the threat that it is.
I also wrote, In the last hour rule, the Office of the Comptroller of the Currency issued a rule Thursday that would force banks to lend to gun manufacturers, oil drillers, and other controversial industries that some have refused to do business with. Many banks have shown their anger and displeasure with the rule but it is critical that the U.S. energy industry, which is such a vital part of our economy, should not be demonized because of political correctness and without due process.
In the Phil Flynn Energy Report for Tuesday, January 12, 2021, I wrote about A theme I have been writing about for a while. I said that “Oil prices are rising as the market is coming to grips with the fact that cap spending on petroleum is going to be woefully short of what we need. Already Saudi Arabia is sensing an opening, cutting production to raise prices without any fear of a tweet, and is now free to manipulate prices higher. President-Elect Joe Biden could unleash a rash of regulations that will constrict U.S. energy production giving the Saudis more price power. Shale producers will have a hard time reacting as not only are they drowning in debt, many banks, because of goals trying to get carbon neutral, will not lend money to the industry for energy projects. Even if they get the money, it is unlikely that will mean more production.
The Wall Street Journal reported that “Most American [oil] companies will have to give priority to paying off debts over boosting production in the wake of the pandemic, analysts say. Even with oil at $50, it would take the 20 largest U.S. shale companies 3.4 years on average to bring debt levels down to healthy levels relative to their overall capitalization, according to consulting firm Wood Mackenzie. In the meantime, we are seeing power and electricity prices spike in Japan and Europe. Strong demand and erratic plans to reduce carbon have left countries struggling to keep the lights on! What is this? California?
As more banks look to boycott US oil and gas companies, it will be the small shale oil producers that will bear the brunt of the pain. In other words, the much-derided “Big Oil” companies will become bigger and stronger while smaller independents will crack under the weight of more regulations and the inability to secure capital. That is one of the reasons that Exxon Mobil has surged in stock prices in recent days.
It is also one of the reasons that the Saudis were open to cutting oil production because they have lost their fear of the U.S. shale industry. Shale oil was a nemesis of the OPEC cartel and now it seems that the Biden Administration shares their disdain for shale. Maybe for different reasons, but the result will be the same. Big oil will get bigger and OPEC and Saudi Arabia will get stronger.
U.S. consumers of course will see what is left of their disposable income go into their gas tanks with more of the profit going to foreign oil producers, The market is also going to have to watch President Biden’s actions with Iran. The President-elect has signaled his desire to rejoin the Iran nuclear agreement, formally known as the Joint Comprehensive Plan of Action (JCPOA), a love that could lift sanctions on Iranian oil which would be another blow to smaller US energy producers.
This is why have been warning to stay hedged. So now let’s look at some of the headlines of where we are now.
The Wall Street Journal headline today screams that “ Oil Price Jumps Above $80 and Natural Gas Races Higher, Turbocharged by Supply Shortages. Crude prices are outpacing copper and other commodities by the widest margin in more than a decade, lifted by wagers on constrained production”
Surging Natural gas prices are cause high fertilizer costs. The BBC writes that “Kraft Heinz says people must get used to higher food prices.” Reuter reports that “Lebanon’s power supplies were back to normal on Sunday after a blackout the previous day when the country’s two biggest power stations shut down because of a fuel shortage, the Energy Ministry said. The closure piled further hardship on Lebanese struggling with job losses, soaring prices, and hunger wrought by the country’s worsening financial meltdown.”
The FT reports that the record prices being paid by suppliers in Europe and shortfalls in gas supply across the continent have stoked fears of an energy crisis should the weather be even marginally colder than normal. Households are already facing steeper bills while some energy-intensive industries have started to slow production, denting the optimism around the post-pandemic economic recovery.
And while some in the gas industry believe the price surge is a temporary phenomenon, caused by economic dislocations owing to coronavirus, many others say it highlights a structural weakness in a continent that has become too reliant on imported gas.
ZeroHedge reported that Russia’s Nat gas giant, Gazprom, raised its 2021 price guidance for natural gas exports while signaling caution on volumes it could ship, as Europe’s energy crisis.
According to Bloomberg, the Russian state-controlled exporter that supplies 35% of European gas needs, reiterated that shoring up inventories at home was its top priority, and only after it has refilled its storage facilities by the end of October, would the company look at potentially increasing exports to continental Europe, Wood & Co., and BCS Global Markets wrote in separate notes Friday following a webinar with Gazprom managers. It would, in theory, explain why Russian supplies to Europe remain well below recent levels.
I could go on but it is clear. We took energy for granted and now we all will pay the price.
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