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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

The globe is in a mad scramble for energy supply as Russia, as many expected, is signaling that they will use their energy dominance over Europe as a weapon. The reverberations are being felt not only in European natural gas markets but even here at home in products like gasoline but more acutely in diesel. As many of you know, if Russia cuts off gas supply, Europe will have to scramble to find alternatives and diesel is one that is already undersupplied globally. Many believe that the Russia, cutting off supply to Poland and Bulgaria, is just a warning shot to rest of Europe to pay for gas in rubles or get cut off.


The threat is already being priced into the market. New York Harbor prices for ultra-low sulfur diesel hit a stunning $4.75 which is a all-time record high. The Energy Information Administration reported that in the US distillate fuel inventories fell by  1.4 million barrels last week and are 21% below the five year average for this time of year. Overnight China said that they would lift import tariffs for coal as even China, where demand has supposedly weakened due to Covid, is obviously worried about supply. For the U.S., make no mistake about it, the surge up in the cash prices means that more than likely diesel prices will break another all-time record high here in the United States that could be a drag for truckers and many businesses not to mention increase the cost of other fuels by proxy.


Yet despite the signs of worrisome market tightness, reports are saying that OPEC and its favorite co-conspirator Russia is only going to stick to its prior plan to raise output by a measly 432,000 barrels a day. Saudi Arabia obviously has shown no desire to add oil to the global market in part because they have a very bad relationship at the Biden administration and also because they are working more closely with Russia than ever. It seems that the Biden administration has driven Saudi Arabia closer to Russia and so it’s unlikely that they will bail the United States out of this energy crisis like our longtime ally used to do in the past.


Reuters reports, “Gazprom supplies almost half of Poland’s annual needs – 10 billion cubic meters (bcm) versus total consumption of over 20 bcm. Less than 8% of gas is used to generate electricity, with nearly 80% powered by coal. Top industrial consumers of gas were not affected by the halt. The contingency measures that could affect them to shield households hopefully will not be used, the Polish premier said on Wednesday. Reuters also reported that the Bulgarian government said deliveries to consumers have been secured for at least a month ahead and it does not plan to restrict supply for the time being. Analysts say Sofia should urgently sign deals with LNG suppliers Qatar, Algeria and the United States as well to increase Azeri deliveries. Bulgaria should also seek to sign solidarity agreements with Romania and Greece to ensure it can use any spare gas they have, analysts said.


Yet the cutoff, along with bullish EIA data, caused ultra-low sulfur to surge as well as natural gas adding the back door support along with the cold spring weather. Freeze offs in the Bakken shale belt hurt production and we get the storage report today. The EIA said that, “In 2021, U.S. natural gas production increased 2% and reached 118.8 billion cubic feet per day (Bcf/d) on a monthly basis in December 2021, the highest on record. Three regions drove this growth: Appalachia, Permian, and Haynesville, which collectively accounted for 59% of gross withdrawals in 2021 compared with 24% in 2011.


Russia’s warning shot to Europe is going to continue to add volatility and also cause buyers to try to do everything they can to secure supply. We believe that the market will be volatile but should be bought on breaks. We’re going to focus on demand which so far, considering all the headwinds, is holding up pretty good here in the US but obviously volatility is going to impact demand in certain areas as it already has. Still, with supplies being below average in every major category and with OPEC not going to lift a finger to try to help the globe out, be prepared for more upward price spikes. Obviously if Russia decides to cut off Europe completely, we could see a price spike of epic proportions. It wouldn’t last but it definitely would be a shock and it would continue to have people in a mad scramble for supply.


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Phil Flynn

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