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
Not only was yesterday’s Energy Information inventory report dangerously bullish, we could have more problems as the Atlantic hurricane season starts today and the Atlantic is starting to heat up. Based on global product inventories, the world can’t afford even the possibility that some refiners may have to shut down.
Thank goodness we are not there yet as US refinery row may have dodged a bullet from the first potential hurricane of the season. Yet because the US refining system must run full out to meet demand, there is no room for error. While this storm will miss refinery row and while it may shut down some oil and gas production in the Gulf of Mexico, it is a reminder that hurricane season is here and this year any storm disruption will have a much bigger price impact than we have seen in recent years.
The Fox Weather Team on the Fox Weather app says that, “Tropical Storm Warnings have been issued across Central and South Florida as Potential Tropical Cyclone One begins to spread heavy rain and gusty winds onshore in the Sunshine State. When the National Hurricane Center designates a system as a “potential tropical cyclone,” it allows forecasters at the NHC to issue advisories, watches, and warnings for a disturbance that hasn’t yet developed into a tropical depression or tropical storm but is expected to bring tropical-storm-force winds (40-plus mph) to land areas within the next 48 hours.
Fox Weather says that as of Friday morning, this developing system located more than 400 miles southwest of Fort Myers, Florida, was producing clusters of showers and thunderstorms. Rain and gusty winds have already developed in parts of South Florida as tropical moisture streams well to the northeast of the system’s center. Fox Weather says that the good news is that upper-level winds remain strong over the Gulf of Mexico, making conditions hostile for any significant development of the potential tropical cyclone, so the worst-case scenario appears to be a low-end tropical storm strike on Central and South Florida.
Because of these strong upper-level winds, the system is expected to be lopsided, with most of the heavy rain and gusty winds occurring well to the east and southeast of its center of circulation. That’s why the storm’s impacts will also occur outside the forecast cone of uncertainty. The NHC is predicting that 4 to 8 inches of rain will fall across Central and South Florida and the Florida Keys through Saturday. Localized rainfall amounts up to 12 inches are possible in some areas. This rain may produce considerable flash and urban flooding. Download the Fox Weather App to keep up with the latest developments.
Oil and oil products lost their fear of OPEC yesterday even after the cartel decided to raise production by more than originally anticipated. The AP reported that the OPEC oil cartel and allied producing countries including Russia will raise production by 648,000 barrels per day in July and August, offering modest relief for a global economy suffering from soaring energy prices and the resulting inflation. The decision Thursday steps up the pace by the alliance, known as OPEC+, in restoring cuts made during the worst of the pandemic recession. The group had been adding a steady 432,000 barrels per day each month to gradually restore production cuts from 2020.
Yet the cartel is not fooling anybody who’s watching this knows that increase in production is just a mere drop in the bucket. Amena Bakr points out that OPEC’s summer surprise translates into an additional 75,000 bpd combined from Saudi Arabia/ UAE, the 2 countries that still have the bulk of spare capacity. This is the cartel even meets their current production quotas, missing 2.6 million barrels a day so the promise of this extra oil is too little to soothe the global markets. Everyone knows it’s not going to be enough to replace Russian oil and it isn’t going to do enough to fix the global refining shortage.
That shortage sent oil product futures soaring after the Energy Information Administration (EIA) reported that crude oil supply fell by 5.1 million barrels from the previous week even after 5 million barrels were released from the Strategic Petroleum Reserve. At 414.7 million barrels, U.S. crude oil inventories are about 15% below the five-year average for this time of year.
Gasoline was not much better. The EIA put total motor gasoline down by 0.7 million barrels last week and is about 9% below the five-year average. Distillate fuel inventories also fell by 0.5 million barrels last week and are still an incredible 24% below the five-year average for this time of year.
Refiners can’t keep up. The EIA said that, “U.S. crude oil refinery inputs averaged 16.0 million barrels per day during the week ending May 27, 2022, which was 236,000 barrels per day less than the previous week’s average. Refineries operated at 92.6% of their operable capacity last week. Gasoline production increased last week, averaging 10.0 million barrels.
Compared to demand, that on a four-week moving average is strong. The EIA said that based on total products supplied demand over the last four-week period averaged 19.5 million barrels a day, up by 3.0% from the same period last year. Motor gasoline demand product supplied averaged 8.9 million barrels a day, down by 3.1% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels a day over the past four weeks, down by 5.4% from the same period last year but Jet fuel product supplied was up 19.0% compared with the same four-week period last year.
We will see the results of the Memorial Day Holiday demand next week but based on this data, there is no wonder prices soared. Today though we are pulling back. Crude yesterday failed to take out the previous day’s high despite a valiant effort. The stock market looks more fragile as Elon Musk has a bad feeling about the economy or more than likely profit-taking ahead of today’s big jobs report. While today may not be the best day to add on to positions, we still recommend buying beaks. The oil and commodity super cycle that we predicted is here and it is not going away unless we see a substantial drop-in economic activity. If you missed this move, feel free to call for what you can do next.
Oilprice.com reported that, “Italy’s prime minister Mario Draghi has hatched a radical plan to contain the oil price rally, a plan that involved creating a cartel of oil consumers to increase their bargaining power.”
Well, somebody should tell the Italian Prime Minister that they already had that, or they were supposed to have had that and it was called the International Energy Agency (IEA). The problem is the International Energy Agency lost its way. Instead of being a proponent of fossil fuels, they became the organization that sold Europe a bill of goods. They tried to convince them that this energy transition off of fossil fuels was in their best interest. They misreported data. They underreported demand and overstated supply. They gave Europe a false impression that somehow this energy transition could go off without a hitch. So now the Italian Prime Minister wants to create a new agency to do the same thing that the International Energy Agency was supposed to do. They were derelict in their duties. The European Commission has argued that an oil price cap should only be used in the case of an emergency, but there appears to be some support for a natural gas cartel. The plan faced strong opposition from the Netherlands and Germany, two of the largest importers of Russian oil.
Yet price caps always create shortages and while Europe flounders, it’s clear that decades of bad energy policy have left them dependent on Russia and Russia and the IEA sucked them into this. Now Europe has no easy answers.
ZeroHedge reports, “Europe’s extreme dependency on Russian energy products from oil to natural gas is made clear recently from the manner in which they have approached sanctions – with incrementalism, slowly sinking back into the bushes. The latest agreement among member nations on export bans targeting Russia is largely oil-focused, not natural gas-focused, with the union demanding an immediate 70% decrease in Russian oil transferred BY SHIP. Oil transferred by pipeline will continue to flow into the EU for now. The ban is intended to expand to 90% of all shipborne Russian oil by the end of this year. Natural gas imports from Russia will also continue.
While some European nations are more dependent on Russian energy than others, overall 40% of the EU’s needs are supplied by the country’s industry. It is not surprising that they are seeking an incremental approach to sanctions, they simply would not be able to survive another winter if they were to go cold turkey and block Russian imports completely. Of course, this does not mean that Russia has to operate on Europe’s timetable. Russia is already reducing exports of natural gas to multiple EU countries, with Denmark, Netherlands, and Germany being the latest to see losses. The EU’s ban was oil and ship focused because they cannot find an alternative source for natural gas that would resolve shortages if they banned everything. Germany in particular would be destroyed by the loss of natural gas supplies from Russia with its 42% dependency.
The EIA reported that, “Natural Gas production in the Permian Basin has hit a record high. The bad news is that based on surging demand, it still may not be enough. We need more pipelines and infrastructure and we need to lift federal drilling bans, but I digress. The EIA reported that marketed natural gas production from the Permian Basin in western Texas and eastern New Mexico reached a new annual high of 16.7 billion cubic feet per day (Bcf/d) in 2021. Annual marketed natural gas production in the Permian Basin has been rising steadily since 2012. The Permian Basin is the second-largest shale gas-producing region in the United States after the Appalachian Basin (spanning Pennsylvania, West Virginia, and Ohio), which produced, on average, 34.8 Bcf/d of marketed natural gas in 2021.
Unlike the Appalachian Basin, where natural gas is produced from natural gas wells, most of the natural gas production in the Permian Basin is associated with gas produced from oil wells. As a result, producers in the Permian Basin respond to fluctuations in the crude oil price in planning their exploration and production activities, including whether to deploy drilling rigs or take rigs out of operation.
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