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
Oil markets are still in a state of flux wondering what the Biden administration has in store for it. No, I am not talking about the fake investigation of the oil companies, that’s another issue. What I am talking about is whether there is going to be a global coordinated release from strategic petroleum reserves around the world. Now some people point to the rising cases of Covid as the reason for the sharp sell-off. I think it has more to do, at least in the short term the possibility of a release of oil from the International Energy Agency.
Oil markets sold off on reports that China was looking to release oil from its reserve, but it was unclear as to whether China was releasing the reserve on its own accord or in coordination with a larger global release. The markets bounced back after Japan and South Korea seemed to suggest that they would welcome a release from the reserve, but they were not in a position where they had extra supply to put out on the market. Both of those countries’ supplies are below average and they feel that can’t afford to draw down their reserve ahead of the high demand period that is right around the corner. Yet they may feel differently if they use stocks that are held by the International Energy Agency.
This morning the Japanese government did say that “given the economic danger posed by the growing energy cost that we [Japan} is going to push for oil-producing nations to raise production and collaborate closely with the International Energy Agency. That caused energy prices to plummet. This comment may suggest that a release from global reserves won’t just come from places like the United States, China, Japan, and South Korea but the entire International Energy Agency. Of course, to pull that off you’re going to need a lot of countries to agree to a release.
A release from the strategic petroleum reserve the International Energy Agency must be agreed upon by all countries. In other words, to get an emergency release, the vote from 30 member countries must be unanimous. The problem is that some of the countries in the International Energy Agency might be reluctant to release oil from the reserves for what they see as a short-term attempt to manipulate oil prices that more than likely will backfire.
Member countries are Australia, Austria, Belgium, Canada Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, The Netherlands, Turkey, United Kingdom, United States. Association countries include Brazil, China, India, Indonesia, Morocco, Singapore, South Africa, Thailand will have to vote yes.
A unanimous vote is probably the reason why the International Energy Agency has only released oil three times since it was created in the aftermath of the 1974 Arab oil embargo. The three times it was activated was in 1991 during the first Gulf War. The second time was after hurricanes Katrina and Rita in 2002 and the last time was during the Libyan uprising in 2011.
A global strategic petroleum reserve release smacks of desperation and it is almost comical that the world has put itself into this corner. While many people blame the covid 19 situation for this energy crisis shortage, the reality is that the anti-fossil fuel push around the globe has left many countries vulnerable to energy shortages and major price spikes.
We suggested yesterday that there could be a test of the $75 area and it looks like that is very possible. We think it would be safe to start buying some options strategies at that point but going into the Thanksgiving Day holiday we could still see some volatility a surprise announcement from the International Energy Agency forcing an extreme low somewhere in the area of $72 while we don’t think that is likely it’s always possible, unlike volume during the Thanksgiving holiday. Reuters reports that OPEC+ compliance with oil production cuts stood at 116% in October, up from 115% the previous month, internal data seen by Reuters showed, indicating the group continues to produce less than its agreed targets. Compliance for participating OPEC members in the group rose from 115% in September to 121% in October, the highest since May, the data showed.
Natural gas prices are bouncing back as well, not only are we getting cold weather but there are concerns about supplies in Europe. Once again look to buy brakes on natural gas and put option strategies going into winter.
Gasoline inventories are very, very tight and we should see them continue to go up despite claims by the Biden administration about the difference between the wholesale price of gasoline and the retail price of gasoline. There’s nothing out of the ordinary here, this is just an excuse for the Biden administration to place blame on the oil companies and misdirect the pressure they’re feeling from voters over high gasoline prices. This attempt to use the spread between the wholesale and retail prices as a sign of collusion is either a total misunderstanding of how the gasoline markets work or it is just a pathetic political excuse to attack US energy. The Biden administration, if they want to be successful for the American people, needs to quit treating the U.S. energy industry as the enemy. The U.S. energy industry is one of our most valuable assets and needs to be treated with respect and they need to be part of the energy transition.
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