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
After the big sell-off in oil last week on the announcement by the Biden administration that they were going to try to orchestrate one of the biggest Strategic Petroleum Reserve releases in history, now it appears the promises of more oil are losing their price impact. Even though we saw some very bearish headlines coming out over the weekend, oil prices still seem to be trying to bottom and are back above the $100 a barrel area. Reports of a truce between Saudi Arabia and the Iranian-backed Houthi rebels, claims by Iran that a JCPOA nuclear deal is imminent along with reports that the International Energy Agency (IEA) is going to join the Biden administration in releasing oil, all don’t seem to be driving the market down anymore.
If you look at the back end of the oil curve what seems to be happening is that the market is predicting that this is going to have a short-term impact on price. We have seen people roll out of the front end of the oil curve and get long contracts like December 2022, December 2023, and December of 2024 while abandoning the front end of the curve. What that says is that the market is predicting that this release from the reserve is going to backfire. It is going to create an environment for higher prices much further in the future. The price drop is going to discourage investment and will leave the market short-handed for years to come. The SPR release is just going to create distortions in a market that is already facing tremendous challenges. It also says is that the buyers of the oil are going to have to pay more in the future to replace the barrels of oil that are being dumped out of global reserves. It is only going to keep the market tight.
Releasing oil from the reserve doesn’t solve the overall problem. The problem is underinvestment in fossil fuels which is leaving the market tight. It is being driven by bad energy policy. Bad policy in Europe has led to war. Bad policy here in the United States is leading to pain for the poor and the middle class. It is adding to inflation, and it is creating an environment where people are going to have to cut down on their spending because they must afford to heat their homes and put gas in their gas tanks. The Biden administration is still doubling down on its green energy policy because they want the poor and middle class to suffer so they can go off on their climate religion and say they save the planet. At the same time they’re using the strategic petroleum reserve for their political piggybank, using the reserve to try to manipulate prices for a purpose that the reserve was never meant for.
THE SPR also will release a lot of sour oil and it is still unclear as to whether they can sell all that oil. The Department of Energy says that the SPR will release approximately one million barrels of crude oil per day over the next six months. Crude oil in this emergency sale will enter the market in two releases. The first 90 million barrels will be released between May and July, through two notices of sale totaling 70 million barrels, and 20 million barrels already scheduled to be released in May 2022. The remaining 90 million barrels will be released between August and October 2022. The Department of Energy must receive bids for the first notice of sale no later than 10:00 a.m. Central Time on April 12, 2022, and will award contracts to successful offerors no later than April 21, 2022. The May through July sales will be conducted with crude oil from the following four SPR sites: Up to 20.5 million barrels from Big Hill; Up to 21.5 million barrels from West Hackberry; Up to 18 million barrels from Bryan Mound; Up to 10 million barrels from Bayou.
The International Energy Agency’s (IEA) 31 Member Countries agreed on Friday to a new release of oil from emergency reserves in response to the market turmoil caused by Russia’s invasion of Ukraine, underscoring their strong and unified commitment of stabilizing global energy markets. The agreement was reached at an extraordinary meeting of the IEA Governing Board, which was held at the ministerial level and chaired by US Secretary of Energy Jennifer Granholm. The new emergency stock release details will be made public early next week. The agreement follows the previous action taken by IEA member countries, announced last month, to which they pledged a total of 62.7 million barrels.
The Ministers noted that Russia’s war in Ukraine continues to put significant strains on global oil markets, resulting in heightened price volatility. This is taking place against a backdrop of commercial inventories that are at their lowest level since 2014 and a limited ability of oil producers to provide additional supply in the short term. Ministers also noted the particular difficulties in diesel markets that is causing shortages of jet fuel. Reuters reports that, “Jet fuel prices are soaring on the U.S. East Coast, home to some of the world’s busiest airports, with buyers anticipating a growing shortage as supply dwindles amid sanctions on Russian energy exports. Costs in the United States for jet fuel have surged, particularly on the East Coast, which largely relies on shipments on the Texas-to-New Jersey Colonial Pipeline for refined products and imports from Europe. However, Europe is dealing with its supply issues, so distillate exports to the U.S. East Coast – also known as PADD 1 – are down nearly 60% on a year-on-year basis, according to Refinitiv Eikon data.
The rush for alternatives for Russian gas is improving the outlook for U.S. natural gas both in the long term and short term. A blast of cold is also helping. EBW Analytics reports that natural gas recovered from an early-week stumble to close higher for a third consecutive week. Injection season contracts capped a record quarterly gain to reach the highest level since 2008—and the most-likely near-term scenario points still higher. The technicals continue to point upward, with $6.00/MMBtu potentially in play within the next 7-10 days. Rising production reaching fresh year-to-date highs and heightened risks for a bearish EIA report on Thursday, however, may limit the realization of further upside.
Upside risks remain. We recommend buying the back end for long-term hedges. Swing traders should love the moves and the outlook for the new quarter looks very bullish. Gasoline prices at the pump should see a bottom next week. Enjoy the priced break while it lasts.
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