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Phil Flynn

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 prices are pulling back after failing to complete the process of breaking out of a bullish pennant formation against a backdrop of a falling stock market. Earlier yesterday oil had been spurred on by very strong supply and demand numbers released by the Energy Information Administration.

The breakout attempt failed as the market is trying to assess the impact of future demand in an environment where global central banks are pulling back on stimulus. The oil market seemed to shake off the Fed’s more hawkish tone and for a while even ignored the UK’s surprise rate increase. Yet while knocking on the door of the 7235 breakout level in the February WTI contract, at the 130 close the market just could not complete the process. So now it looks like we are in a correction phase to the lower end of the pennant.

Yet even as we play these technical games, we believe that at some point there will be a break out to the upside. We think that the tightening cycle around the globe will not slow demand enough to create an oil surplus. Despite the International Energy Agency’s bold and exclusive prediction of a surplus, we believe that the lack of investment in midstream production as well as the Biden administration’s war on fossil fuels could leave us significantly undersupplied in the new year.

The Wall Street Journal reported that, “The Bank of England became the first of the world’s major central banks to raise its benchmark interest rate since the pandemic began, while the European Central Bank said it would phase out an emergency bond-buying program while ramping up other stimulus measures to keep the 19-nation eurozone’s recovery on track.” That move weighed on stocks and ultimately made it harder for oil to break out after early on risk on training faded. Still, oil fell reluctantly in the aftermarket as traders are looking at global inventories that are falling and below average and could fall even further as global refiners are going to be forced to ramp up production to meet strong product demand.

Oil’s risk premium is high as Russia still has troops on the border with Ukraine. The United states told European countries to get prepared to enforce new sanctions on the Russian oil sector if indeed Vladimir Putin decides to move on Ukraine. That of course is going to be very difficult for Europe because their poorly planned energy transition has left the entire continent vulnerable to energy price shocks and energy shortages. It’s easy to see their failures in energy policies that are becoming apparent. Europe seems to be doubling down on policies that could lead to economic and geo-political disaster.

Zero Hedge reported today that the EU is reconsidering its position on extending long-term natural gas contracts. Russia has maintained that the contracts are beneficial for Europe and moving away from them would be a mistake. Russia even went so far as suggesting that Europe’s current energy crisis is its fault. The European Union (EU) is reportedly reconsidering its position on extending long-term natural gas contracts beyond 2049 as part of reforms in its natural gas market to meet net-zero by 2050 goal. The European Commission is considering a proposal to be endorsed by EU heads of state and government this week, to put a timeline to the end of long-term gas contracts and if so could open another rift with Russia. Russia provides one-third of Europe’s gas supply via pipelines under long-term deals and it says Europe’s decisions to move away from long-term deals are one of the reasons for the current gas crisis. The practices of our European partners are to blame. These practices have reaffirmed that properly speaking, they have made mistakes. We were talking with the former European Commission; all of its activities were aimed at curtailing the so-called long-term contracts and at transitioning to gas exchange trading,” Russian President Vladimir Putin said in early October during a meeting to discuss Russia’s energy industry. “It turned out – and today this is absolutely obvious – that this policy is erroneous, erroneous for the reason that it fails to take into account the gas market specifics dependent on a large number of uncertainty factors,” Putin said, per the Kremlin’s website, just as Europe’s gas prices hit record highs.  A must-read on Zero Hedge.

Back in the U.S., the Biden administration continues to try to say that they never have stood in the way of oil and gas production. That comment is causing a lot of laughter and anger in the U.S. energy sector. I have clients whose banks have wanted to close accounts because they produce oil and gas. This subversion of the U.S oil and gas industry is coming from the top Energy czar John Kerry that has been doing everything he can to undermine the U.S. oil and gas industry. Biden’s tax plans, drilling moratoriums, raising taxes on ethanol and threats against oil and gas have made it very toxic for investors to invest in. Of course the Biden administration doesn’t care, it’s owned by the green energy lobby.

Natural gas is pulling back and waiting on winter. The EIA reported that working gas in storage was 3,417 Bcf as of Friday, December 10, 2021, according to EIA estimates. This represents a net decrease of 88 Bcf from the previous week. Stocks were 326 Bcf less than last year at this time and 64 Bcf below the five-year average of 3,481 Bcf. At 3,417 Bcf, the total working gas is within the five-year historical range.

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