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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

Where have all the energy bears gone? Long time passing. I am not hearing terms like ‘lower for longer” or ‘peak fossil fuel demand”. Instead former energy bears are rushing to the long side of the market as the structural shortages are becoming more transparent. The combination of short-sighted decisions to close natural gas fields, become more reliant on wind and solar, and by politicians that think that energy grows on tress have made policy decisions that are causing this oil price spike. Shale producers derided by the green energy folks and those that have blocked pipelines and threatened carbon taxes and royalty taxes have brought us to the point where we are in a structural global shortage. The sad thing about it is this will only serve to hurt the environment as now countries that are short of natural gas are  burning more dirty oil and gas. This price spike was like watching a slow-motion car wreck and the planet and the poor are going to bear the brunt of this green energy foolery.

Oh sure, there were financial pressures to cut back on investment in the fossil fuel sector. The crude oil crash was below zero and many shale producers were losing money on every barrel and then trying to make up for it in volume. Yet it is also the green energy lobby and the politicians that they own that are making decisions they say will save the planet yet may destroy the economy and leave millions poorer and hungrier. Fertilizer prices are soaring because of this crisis and that means higher food costs and less availability especially for the poor. The poor can barely fill their gas tank the way it is yet the policies of the Green New Deal will only make it more expensive.

Yet the lack of natural gas supply and the failure of wind and solar to be a reliable source of energy is driving coal demand and driving those prices to the best run of any commodity this year. China is getting it and called a council to deal with the crisis. Javier Blas tweeted that Premier Li Keqiang signals Beijing is re-thinking the pace of its energy and climate change strategy (asking for more in-depth studies about emissions peak in light of current energy shortages). Lots of emphasis on energy security.

Reuters reports that China’s most actively traded coal futures contract increased by another +9% on Tuesday to a record $230 per ton, as traders anticipate worsening shortages after extensive flooding in Shanxi cut supply and the government’s decision to liberalize electricity prices received by coal-fired power generators, which will likely boost demand.

China is also starting to understand that price caps don’t work. The Wall Street Journal says that, “China said it would allow the price of coal-fired power to rise more sharply, in the hope that market forces can address a power crunch that has threatened growth and caused ripple effects around the world. The decision by the government’s economic planning arm amounted to an acknowledgment that price controls have warped the market. Power producers have been hit with sharply rising costs for the coal they need to fire their generators, yet government rules have largely prevented them from passing on those higher costs to their customers.

The National Development and Reform Commission said the price of coal-fired power could rise as much as 20% from the commission’s benchmark price, compared with the previous 10% cap. It said all coal-fired power would be part of market-based trading with a fluctuation range, up from 70% now, without giving a specific time frame. And it said the price cap wouldn’t apply to industries that consume a lot of power, meaning those users could pay even more when supplies are short according to the Journal.

More evidence that the energy crisis in Europe is still acute. Javier Blas of Bloomberg tweets that, “more evidence is emerging of industrial consumers shutting down in Europe due to high electricity and gas prices. The latest: Spanish steelmaker Sidenor plans to stop production 20 days from now until Dec 31 (that’s equal to ~30% of the time”).

Even with the crowded trade in crude oil, the close at $80 a barrel is significant. We get the American Petroleum Institute report and I have expected a slight draw of 2 million barrels. Gasoline and distillate should drop by 1 million barrels. Refinery runs should rise as margins are improving.

Natural gas is retreating as Russia has supplied more supply to Europe. Weather in the US is natural gas goldilocks and is seeing a correction. Yet big picture we have issues. Reuters reports that, “Qatar, the world’s largest seller of liquefied natural gas (LNG), told consumers it was powerless to cool energy prices as British steelmakers said they could be forced to halt output in the face of soaring costs. The rebound in economic activity after the easing of coronavirus lockdowns has laid bare a shortage of natural gas stocks and other fuel supplies, causing blackouts in some countries. To keep factories open and homes heated, industry executives and governments are having to pay much more for energy and revert to coal and oil, the most polluting fossil fuels.

Thanks,
Phil Flynn

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