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 getting crushed to start the week on reports that Germany is wavering on a Russian oil import ban and last week’s reports that the EPA will allow lift waivers on summer blends of gasoline.
Reuters reports that, “German Economy Minister Robert Habeck said he had heard different things about an embargo on Russian oil and that some countries were not yet ready for such a step. Two European Union diplomats said earlier that the bloc is leaning toward a ban on imports of Russian oil by the end of the year. Germany does not want to trigger an economic catastrophe, Habeck said. The report sent oil tumbling because last week it seemed that Germany was on board with an oil ban. Speaking of wavering, the U.S. EPA is waivering to allow temporary sales of summertime higher-ethanol fuel. This was pushed by the Biden administration as their latest tool to cool gas prices. So far nothing they have tried works.
AAA reported that the cost of regular gasoline came in at $4.19 a gallon which is higher than it was yesterday and almost six cents a gallon higher than it was a week ago. One year ago the cost of regular gasoline was $2.90 a gallon. Diesel drivers are taking it on the chin! The cost of diesel hit another record high with the cost of diesel fuel at $5.32 a gallon. This came in the aftermath of an incredible move on the expiration of the heating oil contract last week. The cost of diesel a year ago was $3.08 a gallon.
One of the reasons why the Biden administration is failing to bring down oil prices is because they bit the hand that fed them, the US oil industry. The price spike can be blamed on many things. You can call it the Putin price hike, but the U.S. energy industry has been hurt by Biden administration regulations. Oil Price reported that U.S. crude oil production is on the decline as of February. According to EIA data, U.S. crude oil production dipped in February to an average of 11.312 million barrels per day—a 457,000 bpd decline from November 2021. January’s average monthly production was also down, to 11.362 million bpd compared to 11.604 million bpd on average in December. The monthly data shows that production has been declining since November 2021. And data shows that U.S. production is still a far cry from where it was in 2019 before the pandemic.
The EIA weekly data that is more frequently followed due to the timely nature of the data releases and does show a downtrend in January and February, but not by nearly as much. Until the EIA published its February monthly on Friday, the only EIA production data available were weekly figures. For each of the four weeks in January, the EIA had estimated that production in the United States averaged 11.7 million bpd, 11.7 million bpd, 11.6 million bpd, and 11.5 million bpd. In February, weekly figures showed that production stood at 11.6 million bpd in each of the weeks. But using this weekly data, those figures look like an improvement in November, and February looks like a strategic slight gain compared to January’s sliding production trend. Weekly data shows that U.S. production has increased in March and April, and we must now wait months to learn if those figures are accurate.
Now normally you would expect that with high prices, production would be going up but we lost some valuable time. The Biden administration’s direct movement to discourage production in oil and gas is already showing up and we’re paying for it at the pump.
Oil prices are also seeing some weakness because the Fed is going to raise interest rates aggressively this week. If the Fed shows no sign of wavering from reducing their balance sheet, raising interest rates and signaling a more aggressive move in the future, then oil prices may sputter. The biggest downside threat to oil is the possibility of a recession. At this point the Fed has an incredibly tough job to do.
China’s demand is also in question. On Saturday, purchasing manager indexes released by China’s government showed contractions in factory and service-sector activity for a second straight month in April. They fell to their lowest levels since the pandemic began in 2020. Cement production in mid-April was less than 40% of full capacity. Shipments of smartphones dropped 18% from a year earlier in the first quarter. Excavator sales within China were down 61% in April compared with the previous year. China’s challenges go beyond the latest lockdowns. The fallout from the war in Ukraine has pushed up costs for Chinese businesses and contributed to fading overseas demand for their exports. Regulatory crackdowns have hit high-growth sectors such as technology and education. Real estate, a primary driver of the nation’s economy, went into free fall last year as developers buckled under heavy debts and home sales slumped.
Natural gas prices are continuing to get supported by cold weather and the possibility that we can see more exports of natural gas in the coming months.
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