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 whipped and flipped on headlines that could have a major impact on whether or not there will be enough supply to meet global demand. On one hand, we are seeing a surge in diesel prices and natural gas here in the United states and the world, balancing that against concerns about China’s economy. Reports overnight has Fitch Ratings cutting its forecasts for China 2022 GTP growth to 4.3% from a previous prediction of 4.8%. While that may be bearish on the face of it, at the end of the day, it means that China will probably use more stimulus which could actually be bullish. We also recovered after it was clear that OPEC is still far from meeting their production quota and at their meeting this week will not raise a finger to increase production more than they had already promised because they want to get more clarity on the slowdown in China as well as the impact from the reduction in Russian oil and gas production.
One of the major questions that must be answered as to whether or not Europe can get off Russian oil and gas and Germany is the wild card in that equation. They are sending mixed signals as to their desire and ability to extricate themselves from Russian oil and gas dominance over the country. Oil prices fell hard on reports that Germany was not on board with an oil ban along with ongoing China lockdown concerns but later came roaring back after it was reported that the European Union will provide more detailed guidance in the coming days on what companies can and can’t do under EU sanctions rules to address Russia’s demands to pay for gas in rubles. The oil embargo could be upheld for years, German Foreign Minister Annalena Baerbock has said. Her green ally Robert Habeck said complete independence from Russian oil was possible by late summer according to Made for Minds.
The lack of Russian diesel exports along with reduced U.S. refining capacity and stricter regulations for drilling has sent diesel prices to $5.37, another record high. This of course was expected and that’s one of the reasons why we’ve been pushing for users of diesel fuel to lock in those prices. The sad part about this is that while prices may fluctuate, we really do not see an easy answer to the diesel shortage in the short term. This obviously is going to have a impact across the whole economy as the U.S. still runs on diesel.
Oil traders will take their cue tonight from the American Petroleum Institute (API) supply report. My expectations are that even though we we’ll see another release from the global strategic petroleum reserve, U.S. oil inventories will still fall by at least 2 million barrels. We might see an uptick in gasoline supplies, but the beleaguered distillate fuel category could see a draw of 2,000,000 barrels.
The distillate draw might have been bigger if U.S. farmers can get into the field. We are seeing planting fall far behind. Successful Farmer said that as of Sunday, the USDA pegged corn planted at 14%, compared with 33% for the previous five-year average; 3% has emerged compared with 6% for the previous five-year average. The report has 8% of soybeans planted, compared with 13% for the previous five-year average. Spring wheat planted was reported at 19% compared with 28% for the prior five-year average; 5% has emerged compared with 7% for the previous five-year average. Winter wheat headed came in at 23% vs. the 29% five-year average. Winter wheat condition was 27% good/excellent and 43% poor/very poor. This compares with the previous year average of 48% good/excellent and 19% poor/very poor. While it is way too early to freak out about the U.S. crop, we do know that from a diesel demand perspective, the farmers have a lot of work ahead of them.
The other market that is on fire this morning is natural gas. Bad weather, along with the anti drilling policies of the Biden administration, have left the natural gas market in a very precarious situation. The Biden administration of course has promised to send every molecule of natural gas they can to Europe to try to help alleviate their shortages but at the same time here in the U.S. they’ve done what they can to discourage production. What’s worrisome is that natural gas production numbers are struggling, and we have insufficient pipeline capacity to some of the producing regions that can help alleviate the tightness of supply. Natural gas exports are at a record high, and we’ve seen the prices double pretty much since the invasion of Ukraine happened.
Today get ready for another volatile day! Our expectations are that the market will find some support and we should start edging back higher into tonight’s API report.
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