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 price of crude oil surged yesterday as it seemed less likely that the Biden administration would release oil from the Strategic Petroleum Reserve (SPR) after being convinced that it might make a bad situation worse. The Energy Information Administration’s “Short Term Energy Outlook” that Energy Secretary Jennifer Granholm said they’d use as a guide as to whether they would tap the reserve, failed to give them enough political cover for a release. The White House said there would not be a release from the reserve and that they were still begging, I mean in contact with, OPEC about raising output and that they were monitoring prices. Almost all market experts will tell you that a release from the reserve to try to manipulate the market lower would only serve to increase demand and create a larger shortage later. This realization did not stop 11 Senate democrats from begging the administration to release oil from the SPR and asking for an oil export ban.
These green energy Senators are feeling the heat from voters who know that the democratic party policies are responsible in large part for higher prices and higher debt levels that Americans are facing. The letter to Biden for the release was signed by Sens. Jack Reed, D-R.I., Robert Casey, D-Pa., Patrick Leahy, D-Vt., Margaret Hassan, D-N.H., Elizabeth Warren, D-Mass., Edward Markey, D-Mass., Tina Smith, D-Minn., Chris Van Hollen, D-Md., Jeanne Shaheen, D-N.H., Richard Blumenthal, D-Conn., and Sherrod Brown, D-Ohio.
Even asking for a U.S. oil export ban shows a fundamental misunderstanding by the Senators on how the global energy markets work. For many, many years, the U.S. relied on heavy oil from Venezuela and Saudi Arabia to run our refineries as U.S. oil production hit a peak. U.S. refineries are built to run heavy oil. Yet after the shale revolution, the USA became a major producer of light oil. Foreign refiners are set up for light oil. U.S. refineries cannot refine larger amounts of light oil. U.S. producers swap lighter blends of oil with heavier blends of oil overseas. So the only impact that we would see from an export ban is to put more American oil workers out of work. We would shut down US production because there would be no place to sell the light oil. There would be a glut of light oil in the United States and it would just sit in caverns. Democrats, after killing the Keystone pipeline and drilling moratoriums, have no qualms about putting U.S. oil and gas workers out of work.
The oil market also received data that suggested that U.S. oil demand is still strong. The American Petroleum Institute (API) reported a bigger than expected draw in crude oil as we expected and big draws on products. API reported that crude supply fell by 2.485 million barrels. Gasoline fell by 3.3 and distillates by 4.5 million barrels.
Natural gas tanked after Russia restored flows to Europe. A coming cold blast may bring us back but we may see major issues with a cold winter. Denmark reopened a gas field that was closed for environmental reasons. A New York stress test is raising concerns about what could happen if Mother Nature gives us a frosty roar. Naureen Malik of Bloomberg writes that the operator of New York State’s power grid wants to make sure it doesn’t make the same mistakes Texas did last winter after a rare storm left millions in the dark. For the first time, the New York Independent System Operator ran models to test whether the lights would stay on if the region is slammed by a once-in-a-century winter storm. The results were potentially ominous. If a storm is severe enough, the models found electricity demand could soar to an all-time high for winter. Wes Yeomans, vice president of operations for the New York Independent System Operator, said during a briefing Tuesday. And if the cold disrupts natural gas flows to power plants, the models found the state’s electricity reserves could plunge by more than 90%. That could leave the state at risk of blackouts.
The EIA in their Short-Term Energy Outlook said that, “The price of U.S. benchmark West Texas Intermediate (WTI) crude oil is near its highest level since 2014, increasing rapidly from low prices in mid-2020. Because of the economic effects, government and business responses, and personal travel changes caused by the COVID-19 pandemic in 2020, demand for crude oil and petroleum products declined rapidly, inventories increased, and prices fell.
The demand decrease in the first half of 2020 resulted in increasing crude oil inventory levels. U.S. crude oil inventories were 440.3 million barrels at the end of January 2020 and increased to 532.7 million barrels by the end of June 2020. U.S. crude oil inventories, however, returned to pre-pandemic levels, falling to 438.9 million barrels in July 2021, which is below inventory levels in January 2020. Crude oil inventories reached a recent low of 413.9 million barrels during the week of September 17, but they increased to 434.1 million barrels during the week of October 29.
This year, demand for petroleum, both in the United States and globally, has largely returned to the pre-pandemic levels in 2019. Demand has grown faster than supply, reducing inventories and contributing to higher prices for crude oil and petroleum products. The price for WTI reached $84 per barrel (b) on November 1, up to $37/b since the beginning of the year. Likewise, the price of Europe’s crude oil benchmark, Brent, rose $34/b over the same period, reaching $85/b on November 1.
In contrast, U.S. crude oil production has returned more slowly. In 2019, U.S. crude oil production averaged 12.3 million barrels per day (b/d). U.S. crude oil production then fell to 9.7 million b/d in May 2020. From October 1 through October 29, 2021, weekly data indicate that U.S. crude oil production averaged 11.4 million b/d.
Today’s driving force should be the Energy Information Administration’s weekly petroleum status report. Still we have to be on guard for a possible release from the strategic petroleum reserve not because it makes sense but because the political pressure is rising on the Biden administration. We also get the EIA natural gas inventory report at 10:00 central, a day early because of tomorrow’s Veteran’s day holiday. My near term target of $88.00 is getting pretty close. Do you think there will be significant resistance in the high 80s for crude oil? Well the fundamentals are still very bullish into next year yet a failure to take out $88.00 a barrel could lead to a sizable correction.
Natural gas is getting pummeled on the news out of Russia and Denmark but we would still use this weakness as an opportunity to establish hedges going into winter.
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