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
U.S. oil is on sale to the world. Joe Biden has been selling out our Strategic Petroleum Reserve at a record pace and China and Europe are buying. U.S. SPR reserves are at the lowest level since 1987 and it appears that not only is the bulk of our oil reserve going to Europe, some will go the China to refill their coffers. Yet what China is really going to start buying is cheap Russian crude. Bloomberg News reported that China is seeking to replenish its strategic crude stockpiles with cheap Russian oil, a sign Beijing is strengthening its energy ties with Moscow just as Europe works toward banning imports due to the war in Ukraine. Details on volumes or terms of a potential deal haven’t been decided yet, and there’s no guarantee an agreement will be concluded, said one person.
Yet regardless of whether they agree, China’s seaborne Russian oil imports will jump to a near-record 1.1 million barrels per day (bpd) in May, up from 750,000 bpd in the first quarter and 800,000 bpd in 2021, according to an estimate by Vortexa Analytics.
The Biden administration says that China’s decision to replenish its strategic stockpiles with Russian oil would not violate sanctions. Let us point out here that in part because of the Strategic Petroleum Reserve release and the anti-fossil fuel agenda from the Biden administration, the cost of US West Texas Intermediate oil is lower than Brent crude for the first time in years based on front months. At least Biden is trying to help bring down inflation in Europe. This comes as gas prices in the US hit yet another record high. AAA reported that Regular Unleaded hit $4.593 on 5/20/22 but Diesel is below the $5.577 record that it hit on 5/18/22. Today it stands at $5.570 so we got that going for us.
This comes on a day when China cut its interest rates to give a jump start to their sagging covid lockdown economy. Meaning that when they reopen, they will have a surge in oil and product demand. Bloomberg reported that the Chinese five-year loan prime rate, a reference for home mortgages, was lowered to 4.45% from 4.6%, according to a statement by the People’s Bank of China on Friday. That was the largest reduction since a revamp of the rate in 2019.
Bloomberg reported that China’s coronavirus lockdowns mean its economic growth may undershoot the US for the first time since 1976, in a role reversal with potential political reverberations in both Beijing and Washington. The world’s second-largest economy will grow just 2% this year, Bloomberg Economics wrote in a report Thursday. By comparison, US gross domestic product will increase 2.8% this year, Bloomberg Economics predicts. JODI reported that China’s total product demand fell by 1.5 MBD in March to 14.5 MBD and was 688 KBD below year-ago levels.
The Biden administration is also signaling a reversal of their policy goals of making Saudi Arabia a pariah state and refusing to engage with the country’s de facto leader Crown Prince Bin Salman. A policy that created an adversarial relationship with the long time US ally that then refused to act on calls by the US to increase crude oil supply and probably caused the Biden administration on a dangerous path to release oil reserves in an attempt to send a message to OPEC and a feeble attempt to try to lower gas prices. Now the Biden administration basically admits that the shunning of the prince was a big diplomatic mistake that turned out to not be in the best interests of the American people and now is signaling it is revising the course. Reports say that Biden is now weighing on meeting the Saudi Crown Prince in June~! Why not? He already met with Russian President Vladimir Putin, and you see how well that turned out.
Biden is in South Korea today. This comes as Japan’s inflation topped 2% for the first time in 13 Years.
It Is probably a good time to go over the commodity price changes year over year. As of yesterday Charlie Bilello posted that , “Natural Gas: +180%/ Heating Oil: +83%/Wheat: +77%/Gasoline: +75%/Cotton: +74%/WTI Crude: +73%Brent Crude +64%/Nickel: +57%/Coffee: +44%/Corn: +19%/ Sugar: +17%/Soybeans: +10% /US CPI: +8.3%/ Gold: -2%/Copper: -6%/Silver: -22%/ Lumber: -48%.
The break in copper comes because of a slowdown in China but is still substantially higher than it was two years ago. Lumber is coming down over record highs and now concerns of a home building slowdown. After looking at commodity price increases last year and this year along with the supply chain, a democratic party that is basically owned by the green energy lobby is no way to secure a better life for the people of this country nor is it a better way to ensure energy security. In fact the democratic policies of the Biden team has led to higher prices for energy and energy insecurity. Shortages are everywhere. There is no doubting the commodity super cycle. Is there anyone doubting that Biden administration energy policies have made the situation much worse and not better?
Now democrats look to make things even worse, pushing anti-gouging legislation. Florida State Rep Kathy Castor touted the Legislation by saying, “Today, the House of Representatives passed the Consumer Fuel Price Gouging Prevention Act, which includes U.S. Rep. Kathy Castor’s (FL14) amendment with Rep. Val Demings (FL10) to investigate price manipulation in the gasoline market and work on a strategy to stabilize oil and gas prices during national crises. “Big Oil companies are ripping off Americans and pocketing record profits for CEOs and shareholders, and not passing savings on to consumers,” said Castor. “Our neighbors have had enough and so have I. That’s why I helped pass the Consumer Fuel Price Gouging Prevention Act today, to take critical steps to crack down on price gouging and excessive price increases by Big Oil companies that result in higher prices for hardworking families at the pump and at the grocery store.
“This legislation includes my amendment with my Florida colleague Rep. Val Demings to ensure FTC investigates anti-consumer gouging by oil and gas executives. We cannot allow Big Oil CEOs to manipulate markets in order to make billions on the backs of struggling Americans by overcharging at the pump. Our action today will help protect the pocketbooks of Americans by uncovering price gouging practices rooted in corporate greed, while also taking away the ability of oil and gas executives to profiteer during a time of crisis. This is a big priority for American families. And it’s one more way to lower energy costs for families as we transition to cleaner, cheaper renewables, which will lead to true American energy security and energy independence.”.
Where does Representative Castor produce the data that the transition to cleaner, cheaper renewable fuels will lead to American energy security and energy independence? She must be living in some type of dreamworld because what we’re seeing is that the green energy transition has done just the opposite. Making false accusations against oil companies and refineries that have been hit with Biden administration’s drilling moratoriums and regulations and bureaucratic red tape without any shred of evidence it’s just more political grandstanding, That is the same type of grandstanding and shortsighted thinking that has led America into this energy crisis. The democrats are desperate to deflect blame from their failed energy policies. Europe is really paying a much higher price for four failed energy policies because of the war between Russia and Ukraine’s short-sighted decision-making.
The EIA reported on the surging natural gas market and the biggest percentage price mover currently in the futures world year over year and provided data that shows supplies are extremely tight. The EIA reported that working gas in storage was 1,732 Bcf as of Friday, May 13, 2022, according to EIA estimates. This represents a net increase of 89 Bcf from the previous week. Stocks were 358 Bcf less than last year at this time and 310 Bcf below the five-year average of 2,042 Bcf. At 1,732 Bcf, the total working gas is within the five-year historical range. So the supply of natural gas is 17.1 % below year-ago levels and 15.2% Below the Five Year average.
As major power providers are warning about blackouts this summer, the Energy Information is touting the fact that the power grid is more reliant on wind and solar. Is there a connection? The EIA reports that In the Summer Electricity Outlook, they expect the largest increases in U.S. electric power sector generation this summer will come from renewable energy sources. These increases are the result of new capacity additions. We forecast that utility-scale solar generation between June and August 2022 will grow by 10 million megawatt-hours (MWh) compared with the same period last summer, and wind generation will grow by 8 million MWh. Forecast generation from coal and natural gas declined by 26 million MWh this summer, although natural gas generation could increase in some electricity markets where coal supplies are constrained.
From a trading standpoint, we feel that the sell-off in whale heating oil and gasoline was way overdone based on fears about the upcoming recession. We believe the supply and demand fundamentals will continue to stay tight and expect that as soon as we see any stability on the stock side, these prices might look cheap. We still believe hedgers should stay hedge even though it appears that we may be hitting a level where prices may level out after Memorial Day. Yet if the Chinese economy starts to reopen and they start buying a lot of oil, we would expect that we will see oil prices exceed the Russian Ukraine invasion highs.
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