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
Both OPEC and the International Energy Agency(IEA) are trying to tell us that the surge in oil prices may be coming to an end. Of course with their track record of projected supply and demand, I would not bet on it. OPEC has a better track record than the IEA though both have been known to talk their book. OPEC Secretary-General HE Mohammad Sanusi Barkindo says that he expects the oil market to be in surplus starting next month. Perhaps he believes that or maybe that is his excuse for ignoring calls for more oil from the Biden administration.
The IEA is not calling for an end to fossil fuel investment, at least not this week, and probably won’t after the embarrassing failure of the green energy elites at the UN COP 26 farce. The IEA says that, “The world oil market remains tight by all measures, but a reprieve from the price rally could be on the horizon. Contrary to hopes expressed in Glasgow at COP26 this is not because demand is declining, but rather due to rising oil supplies.” Perhaps the IEA should acknowledge their role in the global energy crisis when they lost their way from being an agency that represented oil-consuming nations and global economies to make sure the global economy was not hurt by a cartel cutting supply as opposed to becoming a mouthpiece from the green energy lobby.
Still, the IEA in their report put on a brave face looking to U.S. shale producers to save the world from a shortage. While U.S. production is rising, it would be rising a lot faster if the Biden administration had a coherent energy policy and did not come from a party that wants to demonize oil companies and their investors in its typical the mob-like fashion. The IEA says that the U.S. accounts for 60% of non-OPEC+ supply gains in 2022.
The IEA says that global oil demand is strengthening due to robust gasoline consumption and increasing international travel as more countries re-open their borders. However, new covid waves in Europe, weaker industrial activity, and higher oil prices will temper gains, leaving the IEA forecast for oil demand growth largely unchanged since last month’s report at 5.5 mb/d for 2021 and 3.4 mb/d in 2022.
U.S. output is rising amid stronger oil prices. World oil supply is set to rise 1.5 mb/d over November and December, with the U.S. is providing 400 kb/d of the gain. Saudi and Russia combined would account for 330 kb/d in line with OPEC+ targets. The total oil supply had already leaped 1.4 mb/d m-o-m in October after the U.S. rebounded from hurricane Ida.
Global refining throughput is set to increase by almost 3 mb/d from October through December as seasonal maintenance wraps up. Refinery margins rose in October, driven by exceptionally tight product markets, despite the sharp gains in crude oil prices. Further ahead, refinery throughputs are expected to stabilize and generally hold flat in 1H22 before the seasonal increase in 3Q22.
OECD total industry stocks plunged by 51 mb in September, with crude oil and middle distillate holdings accounting for most of the declines. In terms of regions, Europe led the draw-down. At 2 762 mb, total OECD industry stocks stood 250 mb below the five-year average and at their lowest level since the start of 2015. Preliminary data for October point to a marginal stock build.
The IEA says that global oil production is already rising. In October, oil supplies “leaped” by 1.4 mb/d to 97.7 mb/d, with the U.S. post-hurricane recovery accounting for half the increase. A further boost of 1.5 mb/d is expected over November and December even as OPEC+ disregarded pleas from major consumers to ramp up beyond a monthly allocated 400 kb/d to cool prices. Over this period, the U.S. is now poised to provide the largest increase in the supply of any individual country. We have raised our forecast for the U.S. by 300 kb/d for 4Q21 and by 200 kb/d on average in 2022 as current prices provide a strong incentive to boost activity even as operators stick to capital discipline pledges. The U.S. is set to account for 60% of 2022 non-OPEC+ supply gains, now forecast at 1.9 mb/d. Even so, the U.S. will not return to pre-covid rates until the end of 2022.
That increase will go some way to meet rising demand, still recovering from the 2020 covid slump. Refinery activity is picking up after autumn maintenance, while end-user demand is on track to strengthen further as more countries open up to international travel, mobility levels increase and vaccination campaigns gather pace. Nevertheless, new Northern Hemisphere covid outbreaks, slightly weaker industrial activity, and higher oil prices will temper gains, leaving our forecast for oil demand growth largely unchanged from last month’s report at 5.5 mb/d for 2021 and 3.4 mb/d in 2022.
Yet IEA predictions failed to soothe larger energy crisis concerns. Reuters reported that India’s Hardeep Singh Puri told Reuters while on the sidelines at an oil and gas conference in Abu Dhabi that when “petrol prices are – and diesel prices – are going literally through the roof we are concerned”. India has been at the forefront of efforts to urge the Organization of Petroleum Exporting Countries (OPEC) to ensure “responsible pricing” of oil that suits both producers and consumers. “Does it have to be affordable? Yes. If energy is not affordable, you’re going to have a problem,” he said.
Bloomberg reports that Russia says there is no shortage of oil in the global market and there may even be a surplus from early next year, adding to the chorus of other OPEC+ members to push back against calls from the U.S. to raise output faster. Inventories have stopped drawing, which shows there is no deficit at the moment,” Russia’s Deputy Energy Minister Pavel Sorokin told Bloomberg TV, Translation, Don’t look to OPEC Plus to add oil.
The question now is whether the Biden administration will. The Biden team is lost on energy. Pressure from democratic senators to release oil from the reserve is rising while many of the senators that are calling for more oil are from the green new deal camp. Yet with the national average for gasoline at $3.41 a gallon is 11 cents more than a month ago and $1.29 more than a year ago, and 81 cents more than in 2019, these senators are feeling the heat as they should be. Their total lack of understanding of how energy works and its vital importance to the lives of average Americans as well as our national security seems beyond their understanding. They do not understand that the signal that they have been sending on fossil fuel investment has consequences. Now fearful that they will lose their jobs, they are calling on Biden to try to save their hide.
But it’s not just the USA politicians. What is happening in Europe has left the market short supplied. The irony is that in a rush to replace wind and solar and nuclear energy, Europe and Asia are forced into burning more dirty fuels. So in other words, they are adding to greenhouse gas emissions with their silly and shortsighted policy’s. What these countries should have done is continue to embrace natural gas. It is a cleaner alternative to fossil fuels and is the bridge fuel that everybody knows. Countries around the globe should look into new technologies but at the same time, don’t demonize nuclear power because there’s been some huge advances made in nuclear power delivery systems.
Oil prices seem to be ignoring the International Energy Agency report and instead are more focused on U.S. inventory reports this week that more than likely will show substantial drawdowns in crude oil, gasoline and distillate. The oil market is also ignoring the threat by the Biden administration to try to do something to reduce oil prices. They have not pulled the trigger on an SPR release so the markets are feeling more confident. Experts were brought in from the Energy Information Administration and perhaps got them to understand that a release from the reserve would do more damage than good.
China’s attempt to release oil from the reserves failed. Reuters reports that a rebound in China’s crude oil processing in October, coupled with a sharp drop in imports of the fuel means the world’s biggest crude buyer is back to drawing down inventories. China’s refineries used 58.4 million tonnes of crude in October, equivalent to about 13.75 million barrels per day (bpd), up from the 16-month low of 13.64 million bpd in September.
Natural gas prices bounced back from key support due to colder weather coming in. Obviously there are still a lot of concerns about the tensions in Europe with Russia having troops on the border with Ukraine. There are also concerns about those geopolitical tensions and with sanctions on Belarus, a country that is already threatened to cut off European gas supplies. All are keeping the natural gas market pretty well supported. We think there is a possibility that we may have hit the low for the natural gas market and do recommend you be hedged. Also look for option opportunities if straight options are a bit too expensive or risky look to different types of options spreads.
The COP 26 conference found that the last best chance to save the planet might be your last best chance to save your book. The Biden administration could push down prices for a short period yet our expectation is the market is going to continue to be tight. Talks about a surplus next year are possible if we do see a substantial drop in demand. Covid is the wild card and our expectations are it won’t be as bad as feared. We will probably see demand surprise to the upside. Let’s face it, the reason why oil prices are where they are today is that demand continues to surprise to the upside we see no reason for that to change.
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