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 price got hit hard yesterday on hawkish comments by Fed Governor James Bullard and a subpar growth forecast from the IMF. Today the oil market is starting to recover on very bullish American Petroleum Institute (API) supply data report and the fact that the market is also starting to worry about the ability of U.S. oil and gas producers to markedly raise U.S. oil and gas production. Not only does releasing oil from global strategic reserves reduce the incentive to produce more oil and gas, are they are facing a hostile environment from the Biden administration which has done everything it can to hurt the U.S. oil and gas industry.
Logistic problems that are being enhanced by bad policy could leave U.S. oil and gas output falling far short of its real potential. One indicator of future oil production that is not looking good is drilled but uncompleted wells. The DUC’s, pronounced “ducks” as they are called, according to Tim Dallinger, are at the lowest level on record. This comes as the API reported a whopping 4.496 million barrel drop in weekly crude supply despite a 4.7-million-barrel release from the SPR. The API also reported that distillate supply fell by 1.652 million barrels and gasoline supply increased by 2.933 million barrels.
At the same time during the Halliburton earnings call, it was pointed out that right now they are stretched to the limit when it comes to oil services. They said that, “We see market tightness across all service segments. In the first quarter, the average U.S. rig count increased 14% sequentially and is up 62% year-on-year. Additionally, frac activity surged in March after winter weather, and supply chain disruptions occurred earlier in the quarter. Halliburton’s hydraulic fracturing fleet remains sold out and the overall market appears all but sold out for the second half of the year.”
Bloomberg News is pointing out that oil released from the U.S. reserve in many cases will leave the U.S. with, “The rare export of strategic U.S. barrels is evidence of the ever-widening search for crude to replace Russian cargoes seven weeks after President Vladimir Putin’s invasion of Ukraine triggered international revulsion and sanctions. With the global oil benchmark trading above $110 a barrel, traders and refiners also are trying to cope with a cutoff of Libya’s biggest source of crude and little expansion in U.S. output.
A tanker known as the Advantage Spring, loaded low-sulfur crude that was originally pumped from the strategic reserve caverns in Southwest Louisiana at a port in Nederland, Texas earlier this month, according to a person familiar with the matter. The ship, chartered by an affiliate of French energy giant Total Energies SE, is bound for the key European port of Rotterdam, according to ship-tracking data compiled by Bloomberg. Joe Biden, along with several allies, recently offered a portion of their strategic reserves for sale to help alleviate some of the supply pinch associated with the escalating war in Ukraine. Total Energies didn’t respond to a request for comment according to Bloomberg.
While the Biden administration is looking to grant waivers of e-15 this summer, there are growing fears of food and corn shortages. Zerohedge reports that, “About one-third of Ukraine’s farmlands may not be harvested or cultivated this year as Russia begins the second phase of the conflict in the war-torn country. The Food and Agriculture Organization of the United Nations (FAO) noted in a report on Tuesday that the “vast destruction of crops and infrastructure due to the war jeopardizes food production.” FAO estimates approximately 33% of the crops and agricultural land may not be harvested because of the escalating war.
For all those that have called me asking if gasoline prices have topped, I hate to say, do not bet on it. I will say our long product and short crude spreads have done well despite the recent oil pullback. The Energy Information Administration EIA is also predicting higher gasoline prices.
The EIA in their Summer Fuels Outlook, expects that retail gasoline prices will average $3.84 per gallon (gal) this summer driving season, April through September, compared with last summer’s average price of $3.06/gal. After adjusting for inflation, this summer’s forecast national average price would mark the highest retail gasoline and diesel prices since 2014.
They expect the ongoing effects of the COVID-19 pandemic will have a smaller effect on gasoline and diesel consumption in the United States during the 2022 summer season compared with the past two summers. U.S. gasoline and diesel consumption continue to remain below their 2019 averages. EIA expects higher fuel prices this summer because of higher crude oil prices. Crude oil prices have generally risen since the start of the year partly because of geopolitical developments, particularly Russia’s war against Ukraine.
The EIA expects U.S. economic activity to increase through the summer, resulting in more demand for petroleum fuels. Greater demand will contribute to higher crude oil prices. We expect Brent crude oil will average $106 per barrel (b) this summer, which would be $35/b higher than last summer.
Recently, increased volatility of crude oil prices, which account for around 60% of total retail gasoline prices, indicates our crude oil price forecast could change, depending on several factors that remain highly uncertain. Notably, our outlook considers all sanctions on Russia announced as of April 7, but the range of possible outcomes for resulting oil production in Russia is wide.
Natural gas looks like a blow-off top but do not be fooled because the long-term fundamentals are still very bullish. If you missed it, this may be the time to lock in summer strategies and hedges. Bloomberg News agrees. They said that the rally has been supercharged by a surge in demand — from an unusually chilly spring that stoked heating needs, to a spike in exports as Europe tries to wean itself off Russian gas amid the war in Ukraine. That cut U.S. inventories to almost 20% below typical levels. At the same time, traders are staring down forecasts for a hotter-than-normal summer that will almost certainly bolster demand for gas to generate electricity as air conditioners get cranked higher. But what’s really getting the bulls excited is that the market has lost much of its ability to curb consumption through higher prices.
In the past, when natural gas became too expensive, power-plant owners would just dial down some of their gas-fired generators and turn up those burning coal, effectively putting a ceiling on demand and preventing prices from skyrocketing. But utilities’ move away from coal is shrinking inventories and drastically reducing their ability to pivot from gas, leaving the market more vulnerable to wild moves. “There is a path to some crazy prices,” said Paul Phillips, senior strategist at Uplift Energy Strategy in Denver.
Crazy prices will only add to the pain consumers are already suffering from annual inflation that reached 8.5% last month. Energy costs have climbed even faster: Electricity surged 11% over the past 12 months, largely because of increased costs for the gas used to generate power, while gas used to heat homes and for cooking jumped 22% in that span, according to the U.S. Bureau of Labor Statistics. Those increases don’t reflect the 24% surge in gas futures just this month, which extended their advance this year to about 90% — the biggest gain among U.S.-traded commodities.” Natural gas prices are often the input to the economy at large,” said Eli Rubin, a senior energy analyst at EBW AnalyticsGroup. “That’s likely to carry over into higher prices for everything from fuel to food and power.”
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