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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 and natural gas traders are preparing for impact after Biden apparently warned Ukrainian President Volodymyr Zelensky that a Russian invasion was “imminent”.  The president also gave him an old fashion Knute Rockne speech and suggested that the capital city of Kyiv could be sacked and that with 120,000 Russian troops, the President angrily said, “prepare for impact” according to reports.  That of course means oil and natural gas traders also have to prepare for impact even as talks between Russia and Germany are slated today to defuse the tensions.

Crude oil prices are in a strong trending position, backed not only by Russian Ukraine tension but also good old fashion fundamentals like global demand outstripping supply. Many sources say that oil demand has already or will soon exceed pre-pandemic levels and should break all-time demand records as more planes return to the sky. There are also projections that China’s demand is set to rebound big time.  Reuters reports that China’s crude oil imports could rebound by 6-7% this year, reversing 2021’s rare decline as buyers step up purchases for new refining units and to replenish low inventories, analysts and oil company officials said.

Natural gas also had a classic short squeeze, posting its biggest percentage gain on record, driven by arctic temperatures and ramped-up demand because of the Russian Ukraine threat to European gas supply and the fact that it came as the February contract came due for expiration. This is not helping with Biden’s call for natural gas producing nations to raise natural gas exports to Europe as the Russian Ukraine conflict heats up. U.S. natural gas LNG exports are at capacity and while more capacity is to come online, it will not be fast enough to make a difference before a potential Russian invasion.

Reuters reported that, “In the past, when prices in one part of the world surged, LNG buyers have rerouted any cargoes that they could, as they did in December when LNG benchmarks rose dramatically in Europe and Asia. However, buyers typically only have the discretion to reroute a small number of cargoes as most are to supply gas to power plants and industries on long-term contracts. A White House official said the Biden administration is trying to identify additional volumes of non-Russian natural gas from various areas of the world. Russia exports roughly 23.3 billion cubic feet per day (bcfd) of natural gas, of which about 72% goes to the largest European economies. The entire worldwide LNG market is expected to be roughly 53 bcfd in 2022.

Reuters reports that, “Global LNG exports are expected to rise to around 53.3 bcfd in 2022. That is still a fraction of overall worldwide natural gas consumption of roughly 400 bcfd, most delivered via pipelines. Exporting gas on vessels is not as easy as filling a tanker with crude oil. Building new gas liquefaction facilities generally take two to four years. There is only one facility under construction in the United States that could add more liquefaction capacity this year – Venture Global LNG’s Calcasieu Pass in Louisiana, which analysts expect could add about 0.9 bcfd by year-end. The three biggest producers of LNG in 2021 were Australia at around 10.5 bcfd, Qatar at 10.1 bcfd, and the United States at 9.8 bcfd, accounting for more than half of the global supply. They are all exporting at or near capacity. By 2022, the United States is expected to export an average of around 11.5 bcfd, about 12% of the country’s expected record gas production of over 96 bcfd, according to EIA projections.

Gasoline and diesel inventories are also making traders more bullish. EIA data shows inventories at uncomfortably low levels especially with demand projections being so strong. The EIA showed that total motor gasoline inventories are 2% below the five year and that seems to be weighted too heavily on blending components. Distillate fuels are about 17% below the five-year average for this time of year. Propane/propylene inventories are 9% below the five-year average for this time of year.

Based on supply and demand there is still a lot of upside risk here especially on products. Refiners really have to ramp up and there’s not a lot of room for error. That’s another reason hedgers need to be hedged and farmers should buy their fuel. The biggest downside risk I think for oil prices is if Russia decides to stand down and that will be clear by next week. Yet if tensions continue to stay high, be prepared for big moves. But also let us all pray for peace so this conflict can be avoided.

Part of the situation that has led to the tensions between Russia and Ukraine is environmental madness. It is madness that Europe made decisions on climate that left their citizens vulnerable from both an economic standpoint and from a personal safety viewpoint. Yet environmental madness continues and the U.S. seems determined to make the same mistakes. The New York Times reported that, “A federal judge on Thursday canceled oil and gas leases of more than 80 million acres in the Gulf of Mexico, ruling that the Biden administration did not sufficiently take climate change into account when it auctioned the leases late last year. The decision by the United States District Court for the District of Columbia is a major victory for environmental groups that criticized the Biden administration for holding the sale after promising to move the country away from fossil fuels. It had been the largest lease sale in United States history. Now the Interior Department must conduct a new environmental analysis that accounts for the greenhouse gas emissions that would result from the eventual development and production of the leases. After that, the agency will have to decide whether it will hold a new auction.“ This is huge,” said Brettny Hardy, a senior attorney for Earthjustice, one of several environmental groups that brought the lawsuit.” It is also huge for oil and gas and very bullish especially in the backend of the curve.

Have a great weekend and pray for peace.

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Thanks,

Phil

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