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
Russian President Vladimir Putin is committing horrendous war crimes and Europe must continue to fund it. Yesterday’s oil price reversed course after U.S. Treasury Secretary Janet Yellen admitted that because of Europe’s dependence on Russia for oil and gas, a ban on it “would clearly raise global oil prices, it would have a damaging impact on Europe and on other parts of the world.” She said that, “It could actually have a very little negative impact on Russia because although Russia might export less, the price it gets for its exports would go up.” Germany’s Bundesbank agrees to warn that an energy ban on Russia could shrink their gross domestic product by its much as 2%.
This admission by the Treasury Secretary and Germany of the failure of Europe’s green energy policies should be a wake-up call for people who value peace and stability through energy security. This is also a major failure for climate change-obsessed politicians that decided to risk economic and global security with unrealistic plans to get off of fossil fuels. This is the same Treasury Secretary that chided investors in banks not to invest in fossil fuels and now is admitting that the underinvestment in fossil fuels has given Vladimir Putin extraordinary power over Europe and the global economy.
Oh sure, oil is also getting pressure from comments from Fed Chairman Jerome Powell who sounded very hawkish in an IMF interview saying, “We make these decisions at the meeting and we’ll make them meeting by meeting, but I will say that 50 bp will be on the table for the May meeting.” Some fear that a 50 basis point rate increase will be the first of many and could slow down the economy and the demand for oil. It is not just a tightening cycle upsetting traders overnight but also the pricing in of a 50-basis point interest rate increase by September by the European Central Bank. The Bank of Japan on the other hand wants to remain dovish but worries that the course of the U.S. and Europe could force them to change course.
Traders are also still concerned about China’s lockdowns as the headline came out that China is going to face the biggest oil demand shock since early 2020. China you’re not alone. Yet traders are talking about a rearview window piece by Bloomberg that said, “Demand for gasoline, diesel and aviation fuel in April is expected to slide 20% from a year earlier, according to people with inside knowledge of the country’s energy industry. That’s equivalent to a drop in crude oil consumption of 1.2 million barrels a day, they said. It will be the largest hit to demand since the lockdown of Wuhan more than two years ago. The central Chinese city was the epicenter for the coronavirus pandemic.” Yet China is talking about reopening, and it does not seem like the demand drop helped buffer the global oil supply. That is especially true if you look at recent EIA data. Now it is being reported that Hong Kong will await arrivals of nonresidents from overseas starting May 1st according to a government statement.
Yet what we’re learning from this is that national security and interstate energy security are part and parcel of the same thing. On earth day there is going to be a lot of talk about climate change and while climate change is an issue that the globe needs to deal with, it appears that for humanity, the cure so far has been worse than the disease. The Biden administration says that climate change is a threat to national security yet the war in Ukraine suggests otherwise. The biggest threat to global national security actually is the rush to get off of fossil fuels without a realistic plan to make sure that poor people don’t starve and are able to afford to heat their homes. The risk to global security is so that countries will not use their energy dominance to invade their neighbors and get paid for the privilege like what is happening in Ukraine and Europe.
The U.S. climate czar John Kerry even seemed to admit grudgingly that natural gas may be part of the solution. Market Watch reported that Biden’s climate envoy, John Kerry, says he’s putting the natural gas industry “on notice,” suggesting it has a decade at most to solve for the emissions that are driving Earth’s temperature dangerously higher. Kerry, speaking with Bloomberg Television on Thursday, left open the possibility that the industry exists as is, although with the capability to fully capture emissions, including carbon dioxide and the shorter-lasting, but more potent, methane emissions. But he made clear in the interview that time is running out. “If you can capture the emissions — literally, genuinely — then you’re reducing the problem,” said Kerry, who is Biden’s lead abroad on climate-change matters, including on related trade issues. “We have to put the industry on notice: You’ve got six years, eight years, no more than 10 years or so, within which you’ve got to come up with a means by which you’re going to capture, and if you’re not capturing, then we have to deploy alternative sources of energy,” the one-time presidential candidate said.
So we only have six, or eight, or 10 years too to save the planet. Well that’s good news. I thought I heard that if we did not get a major comprehensive agreement at the Cop26, the long-awaited multilateral climate-change conference, that it would be too late to save the planet. Now it looks like we have six or maybe eight or maybe 10 years to save the planet.
How low oil goes depends on how bad the risk-off trade is today. You have two different realities in the oil and product market. On one hand, you have supplies that are at dangerously low levels. On the other hand, the market is selling off on concerns that we will see demand destruction. Demand destruction is caused by fears of further lockdowns in China or demand destruction because of aggressive central bank policies.
The Biden administration is hoping that releases from global strategic reserves will solve the problem but as I’ve written many times before it’s only going to exasperate the problem. The oil reserve releases will offer some short-term relief but ultimately will discourage more investment in fossil fuels and make the problem worse. Oh wait, that is what the Biden administration wants to do, never mind.
Our base case is still very bullish. We believe that this correction will be over soon and the realities of demand exceeding supply will once again dominate oil and gas prices. We don’t see rate increases markedly slowing down demand as quickly as some people are pricing in. We believe that releases from the strategic petroleum reserve will put off normal demand resistance thereby keeping the market much tighter as we work back towards the end of the curve. Now with talk of Hong Kong reopening, that should give the oil a boost. The worst of the demand destruction in China may be behind us.
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