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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 on edge but rallying back after an angry speech by Joe Biden on the tension surrounding Russia and the Ukraine. NATO says Russia is increasing troop numbers at the Ukrainian border. That brought oil and products back up with a little help from the weekly report from the American Petroleum Institute that showed unseasonal like draws in crude, gas and distillates. The API reported that crude supply fell by 1.076 million barrels along with distillate down 546,000 barrels and gasoline by 923,000 barrels. The icing on the cake was a 2.382-million-barrel draw in Cushing, Oklahoma that keeps the concern about tight oil supply in the U.S. even if the report did not live up to some of the pre-report guesses.

Yet despite talk from Russia that they were pulling back troops from the Ukrainian border, NATO and Biden says they have no evidence that that is happening. The Biden said, “I have been absolutely clear and consistent: The United States is prepared no matter what happens. We are ready with diplomacy — to be engaged in diplomacy with Russia and our Allies and partners to improve stability and security in Europe as a whole. And we are ready to respond decisively to a Russian attack on Ukraine, which is still very much a possibility. Through all of the events of the last few weeks and months, this has been our approach. And it remains our approach now.

The Biden put the risk premium back in oil by saying, “I will not pretend this will be painless. There could be impact on our energy prices, so we are taking active steps to alleviate the pressure on our own energy markets and offset rising prices. We’re coordinating with major energy — energy consumers and producers. We’re prepared to deploy all the tools and authority at our disposal to provide relief at the gas pump. And I will work with Congress on additional measures to help protect consumers and address the situation.  

The White House Press Secretary was asked about the consequences here at home. What should Americans be prepared for?  Worst-case scenario, what should they expect if this happens? She said, “Well, I think what the President was touching on was the fact that if Russia decides to invade, there could be consequences here at home. And that could have an impact on energy prices, which could have an impact on prices at the gas pump. And we’re taking — while we are taking active steps to alleviate the pressure on our own energy markets — and every option is on the table to offset rising prices, as you saw the President act last fall — a range of options remain on the table — he also wanted to be very clear and direct with the American people about what the impact could be and the fact that, in his view, defending democracy and liberty is never without cost, but we need to convey to the American people exactly what that could look like.

What it could look like is $5.00 a gallon gas this summer. Yet Biden still is fixated on not engaging U.S. energy producers but still looking to OPEC to make up any energy shortfall. Yet OPEC has all of the spare oil production capacity, mainly Saudi Arabia. The Wall Street Journal says that, “Spare capacity has shrunk as the rebounding world economy has pushed demand up and some oil-exporting countries, because of underinvestment, haven’t been able to return to former production levels. Almost all the spare capacity that now exists—about three million to 3.5 million barrels a day—is concentrated in two countries: Saudi Arabia and the United Arab Emirates.”

Oil still has risk to the upside. Hedge on breaks. OPEC can’t raise production substantially without Saudi Arabia and Saudi Arabia won’t budge without Biden talking to Saudi Crown Prince bin Salman. So in other words, do not expect OPEC to make a difference.

Some people were hoping for a lifting of sanctions on Iran to get more oil. Yet even though Iranian nuclear talks are ongoing, Iran is finding ways to sell oil even under U.S. sanctions. There are reports this morning that Iran has engaged South Korea to resume crude and oil product trade, sanction or no sanctions. 

If the EIA reports similar numbers then the API that should be bullish.

For natural gas, colder temperatures and less production from freeze offs.

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Phil

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