U.S. energy secretary Jennifer Granholm said that, “Oil is a global market, it is controlled by a cartel, that cartel is called OPEC.” That was the Energy Secretary’s response after OPEC Plus said let’s go Brandon to the White House demands that they raise oil production by 600,000 to 800,00 barrels a day. The funny thing is that the energy secretary has it right. OPEC is a cartel yet the only reason why they control the global oil market is because the Biden administration allowed it to happen.

OPEC said oil is not the problem and only agreed to stick to their plan to raise output by 400,000 barrels a day. The Biden assault on US energy production, as I had written from day one, would only serve to allow OPEC and Russia to control global prices. While no one has total control over a market, the Biden administration’s short-sighted and ill-planned drilling moratoriums, pipeline cancelations and signals that there will be more regulations on oil and gas, not to mention that they want to use the SEC to criminalize companies for their carbon footprint, has restrained US oil production and innovation to the point that it has put OPEC plus Russia in the driver’s seat. The Biden administration has no right to whine or complain about OPEC because they gave them the power. The Biden administration has left the global economy more vulnerable to oil shocks.

The shale oil producer was the only thing that kept OPEC in line and buffered the world economy from supply shocks. OPEC plus Russia feared US shale because they could compete with them and take their market share. Yet the anti-fossil fuel, anti-pipeline Biden administration says that they care for the average working man and woman but support policies that have only made them poorer. Biden blames OPEC for their policies. There may be a smart way to get off of carbon, but it has to be based on science and reality. Not some doomsday date that global warming experts keep pushing back decade after decade. We have to reverse these failed energy policies or they will put our economy further at risk. It will not be OPEC’s fault but the Biden administration’s fault.

There are some rumors that Biden will work on a coordinated release from the world’s SPR but that will backfire too. There is not enough oil in the reserve and the Saudis will more than likely meet them barrel for barrel. Also there is talk that the US will grant Iran some waivers to sell oil which would be the ultimate insult to the American oil and gas worker. Not to mention the union workers that they have already put out of jobs.

Oil prices, despite the selloff, are solid. A retest of the Bollinger band on the daily chart should be a support. The market bounced off of it and it could retest but that should be a good area to position. The back end of the crude curve is holding up better which signals overall strength.  

John Kemp at Reuters explains where we are at. He said that, “depleted U.S. oil inventories leave the market vulnerable to shocks. He points out that, “U.S. petroleum consumption has returned to pre-pandemic levels as businesses have reopened and internal road and air travel has resumed, but production and refining are lagging, which has depleted stocks. Last week, the total volume of petroleum products supplied to the domestic market averaged 20 million barrels per day, essentially the same as the pre-pandemic five-year seasonal average for 2015-2019. Of the major fuels, volumes of gasoline and distillate supplied are running at or marginally above pre-pandemic rates, while jet fuel is still somewhat below, reflecting continued problems in the aviation industry. But the volume of crude processed by refineries has been running roughly 5% below pre-pandemic rates, putting downward pressure on inventories of refined fuels. 

By the end of last week, gasoline stocks were 5 million barrels below their pre-pandemic seasonal average while distillate stocks were 6 million barrels below (“Weekly petroleum status report”, EIA, Nov. 3). Domestic crude production also remains well below pre-pandemic levels, which has resulted in an even stronger drawdown in crude inventories. Commercial crude inventories ended last week 18 million barrels (4%) below the pre-pandemic average with the most severe shortage concentrated at Cushing, where stocks were down 25 million barrels (48%).

The acute shortage at Cushing, OK, which is the delivery point for the NYMEX crude futures contract, helped push nearby futures prices into their second-steepest backwardation in the last decade. More broadly, total stocks of crude and products outside the strategic petroleum reserve had fallen to their lowest level since 2014. But there are some tentative signs the supply situation is stabilizing: deficits in both crude and products inventories to the pre-pandemic five-year average have narrowed slightly since late September.  

Likely in response, WTI futures prices for deliveries in December 2021 have been trending gently downwards since Oct. 26 and the six-month calendar spread has been softening since Oct. 29, though it is too early to determine whether this marks a turning point or simply a temporary pullback. The overall supply situation remains tight. Depleted inventories mean there are few shock absorbers to cope with any unexpected interruption in output or stronger than anticipated growth in consumption. At this point, supply problems or unexpected strength in demand could result in sharp price increases because there is no slack left to absorb them in the short term unless OPEC+ can be persuaded to increase its output faster.

Thanks,
Phil Flynn

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