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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 war in Ukraine has unmasked the shortsighted energy transition and the dangers of trying to get off fossils too fast and now it may be up to the U.S. energy producer to save the world. While the Biden administration continues to demonize the US oil and gas industry and continues to cancel drilling leases at the same time, they are promising Europe plenty of supply.

This week we got another whopping 5-million-barrel release from the Strategic Petroleum Reserve that no doubt will mostly be sent to Europe. In the meantime, US consumers will be battling record-high gasoline prices and diesel prices and the problem becomes a situation where product prices are fighting to get attention from refiners to produce enough supply. AAA reported new record high prices today with regular unleaded hitting $4.523 and Diesel $5.573.

Don’t even get me started talking about the red tape that the Biden administration has imposed on the oil and gas permitting process, undoing Trump era streamlines for approvals. The Biden policies on energy are killing the economy and the poor and the middle class as he sticks to his failed energy agenda. In all fairness to the President, he might not understand the damage he has done because he probably gets his news from MSNBC or The View.

Yet if we are going to pull out of this mess on a day where we could see some real crude oil price fireworks on the June option expiration, we will have to look to the US energy industry, the best in the world, to bail us out and save the world from this green energy madness.

The Energy Information Administration (EIA) reported on US production progress, the EIA said that, “Natural gas production in the Bakken region grew while crude oil fell in 2021. EIA says that annual natural gas production (measured as gross withdrawals) in North Dakota’s Bakken region increased by 9% in 2021, even as the region’s crude oil production declined by 6%, according to our Drilling Productivity Report. In 2021, natural gas production reached an annual high of 2.97 billion cubic feet per day (Bcf/d), surpassing the previous high of 2.95 Bcf/d set in 2019 and reversing an 8% decline in 2020 amid demand decline and production shut-ins related to the COVID-19 pandemic. In contrast, the Bakken region’s average annual crude oil production peaked at 1.45 million barrels per day in 2019 and then declined by 17% in 2020 and by 6% in 2021. The region’s ratio of natural gas to crude oil production has been increasing since 2008 and continues to accelerate.

Plus the USA energy industry does it cleaner than anybody else. The EIA says that North Dakota state regulators and operators continue to reduce natural gas flaring at the wellhead that has accompanied natural gas production. The North Dakota Industrial Commission (NDIC) raised natural gas capture targets, or the percentage of natural gas captured at the wellhead rather than flared, from 74% in October 2014 to 91% at the beginning of November 2020. As of December 2021, North Dakota’s natural gas flaring rate averaged 7.5%, which means that 92.5% of the natural gas was captured.92.5% is not bad for the production of the words cleanest burning fossil fuel.

Oil traders are also focused on whether Europe can get together and put a ban on Russian oil. Hungary seems to be the lone holdout, yet meetings are continuing, and I expect that they will get a deal done.

While there are some predictions that if they don’t get a deal done to ban Russian oil, we could see prices fall dramatically. One article said that prices could fall as low as $65 a barrel, but I don’t think so.

The only way oil gets back to $65 a barrel is if we see a real drop in global economic growth and a bad recession. I don’t think we’re there yet. That is why the oil market is still strong. Besides, some countries are still buying Russian oil.

Reuters is reporting that Russia became the fourth-largest oil supplier to India in April, with volumes set to rise further in coming months as low prices spur demand from the world’s No. 3 oil consumer and importer, tanker tracking data showed. Russia’s share in India’s oil purchases rose to a record 6%, about 277,000 barrels per day (bpd) in April, up from about 66,000 bpd in March, when it was in 10th position, according to the data, which was supplied by trade sources.

Saudi Crown Prince bin Salman stated the obvious when he said it isn’t just lack of oil causing the shortages but the lack of refining capacity as well. He said that there are, “physical impediments that no producer can solve,” which come as spiking gasoline and diesel compound inflationary pressures that are worsening a global cost-of-living crisis. At the same time, the determination of OPEC+ to stick to modest supply increases — despite flows from coalition member Russia being disrupted by an international boycott — has drawn the ire of US lawmakers. “There is no refining capacity commensurate with the current demand and the expectation of the demand in the summer.”

OPEC output in the latest data is still missing the mark on production and it might get worse. S&P Global is reporting that Libya’s oil supply is under threat as rival governments jostle for power. TYjey says that Libya’s oil sector is on tenterhooks after clashes in Tripoli on May 17 following the failed attempt by the Government of National Stability’s Prime Minister Fathi Bashagha to take control of the country’s capital, industry sources told S&P Global Commodity Insights. This comes as Libyan crude production is languishing at around 800,000 b/d due to a series of oil blockades at its key terminals and infrastructure as tensions between Libya’s two rival governments intensify. The Government of National Unity’s Prime Minister Abdul Hamid Dbeibah has refused to concede power after Fathi Bashagha was elected by the eastern-based House of Representatives in February. Dbeibah has said he will not step down until an elected government is voted to power. Amid this, around a third of Libya’s oil production remains offline as the thorny issue of distribution of oil revenues reared its head between the eastern and western governments of Libya.

On the oil production side, it looks like gasoline has been outpacing distillate oil the last couple of days. It still fighting for refinery space to make sure we have enough gasoline to get through the Memorial Day holiday weekend. I think both the products and the crack spreads are going to continue to look extremely strong as the market for products is extremely tight. Of course for the last couple of years we’ve been touting to anybody who would listen that they needed to get hedged on the products. If you failed to get hedged, you’re feeling the pain but there may still be some time to do some strategies that can ease that pain. We continue to warn everyone not to underestimate the power of this bull market.

The same could be said of the natural gas market. Natural gas is in an extremely explosive position and if we get a hot summer, supplies are going to be tight and we should see record-high prices this summer. Not only will places like Texas and California have a hard time keeping the lights on, the prices you’ll pay for electricity could go through the roof.

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Phil Flynn

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