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 Biden administration has many issues, and an incoherent energy policy is just one of them. Oil prices now are weighing the possibility that the Biden administration will try to release oil from the Strategic Petroleum Reserve that most experts, including myself, agree will only have a short-term impact and only serve to make prices go higher in the long run. Senator Chuck Schumer showed the conflicting positions by calling on the Biden to release oil from the Strategic Petroleum Reserve and at the same time, tell the rest of us that we need to get off of fossil fuels.
Yesterday we had fears of an SPR release, along with the possibility that the Fed will be more aggressive raising rates after a strong retail sales number. There was also comments by St. Louis Federal Reserve bank president James Bullard that suggested that the Fed should be more hawkish and suggested a quicker taper of asset purchases confirming the market has it right about two interest rate increases next year. That caused the dollar to rise and oil prices to fall. Also, fears were raised by the International Energy Agency and OPEC of impending oversupply as covid-19 cases in Europe increased. The downside risks to demand recovery did not help the bull case for oil. Yet the crude oil market found support after comments from U.S. House Majority Leader Steny Hoyer when he lowered expectations that the U.S. will tap the Strategic Petroleum Reserve to help lower gasoline prices.
After the close, the American Petroleum Institute reported some very supportive numbers showing that our crude supply increased by 655,00 barrels. That was smaller than anticipated and should include a 3 million barrel plus release from the Strategic Petroleum Reserve. The API also showed another 491,00 barrel drop in Cushing, Oklahoma. The API showed that gasoline supply fell by 2.792 million barrels. Distillates saw a slight 107,00 barrel build.
The other option the Biden team is talking about is a ban on U.S. exports That would just shut down the U.S. oil field and put U.S. oil workers out of jobs, and have little or no impact on gasoline prices. As we have said before this will create a glut of light sweet crude that U.S. refiners cannot refine. The sweet crude oil fields will shut in and the Brent prices will go through the roof thereby driving up gasoline prices which are more in tune with Brent crude than they are with WTI.
Joe Biden’s administration came in like a greenhouse of fire, canceling pipelines putting on drilling moratoriums, and pledging to the world that we would get off fossil fuel. He has promoted cabinet members who vow to put U.S. energy companies out of business. Yet now they have to face the stark reality that their policies are making us more dependent on OPEC and Russia for global supply. They signaled to investors to stay away from fossil fuels and that is now hurting the economy and hurting average Americans. The disappointment with the Biden administration is showing up quite clearly in the polls as it’s hard to find anything that they have done right. They are pinning their hopes on the bipartisan “build back better” plan but at the end of the day if you’re going to build back better you’re going to be building it with much higher commodity prices because of some of the policies they have implemented. Fossil fuels of course are going to be a major factor in building back America and more and more we’re becoming more dependent on OPEC plus Russia.
From a geopolitical standpoint, the Biden administration is realizing that the pullback on energy supplies is a major problem. Russia is using its energy dominance to control Europe and is creating big issues for the region. Not only does Vladimir Putin have troops on the border of Ukraine there is talk that they are trying to secure supply with Iran to further monopolize supplies in Europe. OIL Price reports that, “Oil Price Russia has managed to secure the largest share in Iran’s huge Chalous gas discovery, a move that could have huge economic and geopolitical consequences. A senior Russian official believes this was the final act in securing control over the European energy market. While Iran appears to have lost out economically on this deal, it will provide the Islamic Republic geopolitical support and the IRGC a nice slush fund according to Oil Price.
The Wall Street Journal reports that, “Iran has resumed production of equipment for advanced centrifuges at a site the United Nations’ atomic-energy agency has been unable to monitor or gain access to for months, diplomats familiar with the activities said, presenting a new challenge for the Biden administration as it prepares for nuclear talks. The renewed work has raised concerns among Western diplomats who say it could allow Iran to start secretly diverting centrifuge parts if Tehran chose to build a covert nuclear-weapons program, although they say there is no evidence at this point that it has done so.
The Biden administration is being forced to open up more of the Gulf of Mexico for drilling. The Wall Street Journal reports that, “The Biden administration on Wednesday will auction oil drilling rights to 80 million acres in the U.S. Gulf of Mexico days after joining a global agreement that for the first time targeted fossil fuels as the main driver of global warming. The sale by the Department of Interior will be the first under Joe Biden, whose administration paused drilling sales under a promise to end development on federal properties. But Biden lost a court fight to oil-producing states that sued to reinstate the sales. The administration has appealed and a suit by environmental groups seeking to halt the sale is pending. The U.S. is moving ahead to hold onshore lease auctions in several states early next year.
Interior’s Bureau of Ocean Energy Management will auction almost all available unleased Gulf of Mexico blocks, 80 million acres, at a live-streamed event on Wednesday morning. It will be the first opportunity to test the oil and gas industry’s demand for Gulf acreage with energy prices at multi-year highs. U.S. crude futures on Tuesday settled at $80.76 a barrel, up 95% in the last 12 months. The Trump administration’s final Gulf sale, held last November, generated a modest $121 million in high bids. But oil companies Royal Dutch Shell (RDSa.L), BP (BP.L), and Chevron (CVX.N) are seizing on the higher prices to advance offshore projects.
Reuters reports that, “Oil and liquefied natural gas (LNG) prices could climb higher this winter as low inventories threaten supply disruption or demand shocks for the market, an official of Vitol (VITOLV.UL), the world’s top independent oil trader, said on Wednesday. Consumption of natural gas, coal, and oil has surged as the global economy re-opens from covid-19 curbs, leading to price spikes and supply crunches that could threaten the recovery.
Well you might not be able to beat the energy crisis but you might as well try to join it. Look to make sure that you’re hedge for upside risk on natural gas and oil for this winter. If Mother Nature gives us a cold winter we’re going to have sharply higher prices.
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