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
Where were you when the lights went out? That may be the question that more Americans could be asking. Naureen Malik and David Baker at Bloomberg report that, “Vast swath of North America at risk of Summer Blackouts”. It may be a good thing that you did not buy that electric car after all. It also is not good news for Biden’s dream of having us all drive electric cars. Regardless, oil bulls felt like the lights were turned out on them after the stock market dumped as recession fears overshadowed what would be on a normal day, wildly bullish supply and demand data.
It is rising diesel and gas prices that are feeding inflation fear as that, along with rising food prices, are cutting into the profit margins of Walmart and Target, sending signals that inflation along with the Fed could push us closer to that dreaded recession. The question for oil traders is how much this anticipated slowdown in the global economy will impact demand in a market that right now does not have enough supply. Yet before we get into all of that, why don’t we stop and ponder where we are at when it comes to the green energy transition and how that thinking could leave many Americans at risk or in the dark.
Naureen Malik and David R Baker wrote, “A vast swath of North America from the Great Lakes to the West Coast is at risk of blackouts this summer as heat, drought, shuttered power plants and supply-chain woes strain the electric grid. They say that power supplies in much of the US and part of Canada will be stretched, with demand growing again after two years of pandemic disruptions, according to an annual report. It’s among the most dire assessments yet from the North American Electric Reliability Corporation, a regulatory body that oversees grid stability according to Bloomberg. “It’s a pretty sobering report, and it’s clear the risks are spreading,” John Moura, director of reliability assessment and performance analysis, said in a press briefing. “I certainly do think it’s our most cautionary tale here.”
Bloomberg says that, “Climate change is partly to blame. A historic drought is covering the western US, limiting supplies of hydroelectric power, and forecasts call for a hotter-than-average summer. But the fight against global warming poses its risks as older coal-fired plants close faster than wind farms, solar facilities and batteries can replace them. “The pace of our grid transformation is out of sync” with the physical realities of the existing power network, Moura said according to Bloomberg.
Now I could argue that the climate change article is way overplayed as opposed to poor planning and investment and short-sighted policies, but I digress so let’s get back to it. Because even green energy sources are getting hit. Bloomberg says that, “Supply-chain snags, meanwhile, are delaying Southwest solar projects and Texas transmission lines, while coal plants are having trouble obtaining fuel amid increased exports. And power grids face a growing threat of cyberattacks because of US support for Ukraine following the Russian invasion. Electricity supplies will be particularly tight in the Midwest. Across the region, enough older plants have shut down to cut generation capacity by 2.3% since last summer. Demand, however, is expected to grow. Even when temperatures are normal, grid managers may need power from neighboring regions to keep air conditioners humming, and a heatwave or low wind speeds could trigger blackouts, according to the report. NERC had previously warned the Midwest could face power shortfalls as plants close, but not until 2024. The region also is missing a key transmission line damaged by a December tornado, with repairs expected to wrap up in June.
Early retirement of fossil fuel plants is an issue in other parts of the US as well. The coal and natural gas plants that continue to operate are running harder, and NERC expects them to break down more often, Moura said. The gas-fired plants in Texas that shut unexpectedly late last week during a spring heatwave underscore that risk, he said. There is much more in this Bloomberg Must read.
A must-read is also the Energy Information Administration (EIA) supply report that if you just read that data without looking at the stock market you would think we would have seen solid buying. Yet it is clear that the market is fearing we cannot avoid a Biden Recession. Instead of addressing the real need for sensible energy policy, the administration is throwing crazy ideas like price caps, taxes on oil companies and refiners, and talking about making normal profit margins and price swings illegal. Someone needs to explain to them that these policies will only add to the shortage, raise prices and cause more economic hardship for the groups that have been hurt the most by the Biden Policies.
We should also point out the failure misguided Biden releases from the Strategic Petroleum Reserves that started in November to try to control gas prices. Reuters reports that, “U.S. PETROLEUM inventories including the strategic petroleum reserve depleted by another 8 million bbl to 1,691 million bbl last week. Inventories have depleted in 72 of the last 98 weeks by a total of 426 million bbl since the start of July 2020. The persistent shortage of oil is putting intense upward pressure on prices according to Reuters.
We have also seen WTI trade at a premium to Brent crude recently. We’re seeing a significant shift in the global market mainly because U.S. oil inventories are falling to dangerously low levels. The market is also growing more concerned with the fact that the United States has exported a large amount of their strategic petroleum reserves to other countries leaving US inventories in the reserve at the lowest level since 1987. US production is still failing to provide the West Texas Intermediate contract any confidence because of Biden administration policies drilling leases being canceled and the fact that this administration has been punitive against projects like the Keystone Pipeline and other vital infrastructure that is going to be needed to keep the WTI contract trading at a discount to foreign markets.
The EIA reported that week over week domestic demand for all oil products increased by 400,000 barrels a day at the same time oil product exports increased by 800,000 barrels a day. Stocks in Cushing, OK fell by 2.4 million barrels giving me the assumption refiners are trying to pull heavier grades of crude to meet the ongoing diesel shortages. Weekly production numbers for oil did increase by 100,000 barrels a day and the SPR release was a whopping 5,000,000 barrels. Crude demand increased by 880,000 barrels and refinery crude inputs increased by 239,000 barrels a day.
The EIA reported overall U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.4 million barrels from the previous week. At 420.8 million barrels, U.S. crude oil inventories are about 14% below the five-year average for this time of year. Total motor gasoline inventories decreased by 4.8 million barrels last week and are about 8% below the five-year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories increased by 1.2 million barrels last week and are about 22% below the five-year average for this time of year. Propane/propylene inventories increased by 0.3 million barrels last week and are about 10% below the five-year average for this time of year. Total commercial petroleum inventories decreased last week by 2.9 million barrels.
Total products supplied or demand over the last four-week period averaged 19.5 million barrels a day, up by 1.7% from the same period last year. Over the past four weeks, motor gasoline products supplied averaged 8.8 million barrels a day, down by 1.2% from the same period last year. Distillate fuel product supplied averaged 3.8 million barrels a day over the past four weeks, down by 6.7% from the same period last year. Jet fuel product supplied was up 28.6% compared with the same four-week period last year. This should have been very bullish.
Natural gas has been volatile and is still very bullish but is getting caught up in the slowdown fears. We get the Energy Information Administration support today and we’re looking for an increase of 89 billion cubic feet into storage. Still, storage levels are below normal and there is an incredible growing demand for the United States liquefy natural gas. There is also going to be a lot of investment coming into the United States to expand our capacity to export in the coming years assuming it can get approval by the Biden administration. That is the same Biden administration that promised every bit of LNG that we can will be sent to Europe.
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