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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

Oil is back to its parabolic frolic. Even as we are seeing oil and products diverge, we are hoping to see more refining capacity come back online in China as China reopens its economy. Hopefully, that will mean that the parabolic frolic on retail gasoline and diesel prices may slow. But for crude oil, it may retake the leadership it lost to oil products over the last month as the market was screaming for more refining capacity especially for diesel after we have seen the US ban Russian crude oil.

We are starting to see a bit of diversion after Scotia Bank reported that new refinery additions should exceed demand growth between the end of April and September of this year. They estimate four large refineries totaling 1.45 million barrels per day of capacity either have already been restarted or will start up.

That’s a good thing because AAA reported yet another record-breaker at the pump for both gasoline and diesel. AAA put regular unleaded at $4.955 and diesel at a very painful $5.719 a gallon. John Kemp at Reuters puts that in perspective by writing that, “U.S. RETAIL GASOLINE prices have climbed to an average of almost $5 per gallon, the highest after adjusting for wages since June 2014, when Islamic state fighters were threatening to capture the giant oilfields of northern Iraq. Wage-adjusted pump prices are in the 92nd percentile for all months since 1990, up from the 60th percentile in December 2021 and the 53rd percentile in June 2021.

S&P global reports that China’s independent refining sector’s feedstock imports in May tumbled to a 34-month low as the prolonged lockdown in major cities capped crude buying. Inflows could improve in June as COVID-19 restrictions gradually ease with cheap Russian deliveries rising, industry sources said on June 6.

The API also showed a bit of hope that this massive run-up for diesel and gas prices may slow. The API reported that, “Crude application increased by 1.845 million barrels while gasoline supply increased by 1.821 million barrels and distillates by a hefty 3.376 million barrels. Sure, supply is still well below average but maybe a step in the right direction. In today’s Energy Information Administration (EIA) supply report there will be a lot of focus on gasoline demand to see how drivers fared over the Memorial Day holiday. If demand looks weak that could further cool off RBOB prices.

Still, China’s reopening is going to keep the crude side higher and OPEC says they can’t do anything about it. UAE Energy Minister H.E. Suhail Mohamed Al Mazrouei warns that the oil situation Is not encouraging when it comes to quantities of crude OPEC+ Russia can bring to the market. The big risk is when China Is back to consuming oil.

Oil supply is tight as Biden’s failure release of the Strategic Petroleum Reserve is having the opposite effect on the oil market that he intended. Treasury Secretary Janet Yellen said that if we did not release oil from the reserves, then oil prices would be higher. I would argue it is the opposite. Foreign Affairs put it nicely when they wrote that recent global energy policy, “is bound to invite comparisons to the 1970s when excessive government intervention in energy markets exacerbated repeated energy crises.” They should leave it there. The OECD says that “OECD: NEGATIVE SUPPLY SHOCK FROM OIL PRICES SHOULD HAVE LESS OF A STAGFLATIONARY IMPACT THAN IN THE MID-1970S. WHEREVER INFLATION IS DRIVEN BY OVER-BUOYANT DEMAND, AS IN THE US, MONETARY POLICY CAN TIGHTEN FASTER.” So, we got that going for us.

Still, high prices cure high prices and if growth slows, that could slow the price increases. The Wall Street Journal reported that the World Bank sharply lowered its growth forecast for the global economy for this year, warning of several years of high inflation and tepid growth reminiscent of the stagflation of the 1970s. Citing the damage from the war in Ukraine and the Covid-19 pandemic, the bank said global growth is expected to slump to 2.9% in 2022 from 5.7% in 2021, significantly lower than its January forecast for 4.1% growth. Furthermore, growth is expected to hover around the reduced pace over 2023 and 2024 as the war disrupts human activity, investment, and trade while governments withdraw fiscal and monetary support.

So, products should show some slowing and crude should be stronger. Still, it might be too dangerous to lift hedges just yet because there is no room for error in the global petroleum space.

Natural gas pulled back a bit but fundamentally is still wildly bullish, yet maybe some rays of hope for price ease later this year as long as summer is mild. EBW Analytics reports that, “Natural gas reached as high as $9.544/MMBtu intraday Tuesday as the June forecast turned hotter and production dipped. Further gains remain likely ahead, but another test of technical support may be possible first. Searing heat is lifting ERCOT loads to record highs this week, with power sector gas burns likely to jump 3.6 Bcf/d next week on soaring cooling demand. Production remains a critical market metric over the next 30-45 days, with upside price pressure likely to build until evidence of rising supply materializes. The end-of-October storage outlook faded to just 3.3 Tcf over the past week, furthering the bullish seasonal fundamental outlook. As prices clear $9/MMBtu, however, prospective price risks may lean less asymmetrically bullish.

Biden is making good on his pledge to supply Europe with LNG at the expense of Asia. The Energy Information Administration (EIA) reported that during the first four months of 2022, the United States exported 74% of its liquefied natural gas (LNG) to Europe, compared with an annual average of 34% last year, according to our recently released Natural Gas Monthly and EIA estimates for April 2022. In 2020 and 2021, Asia had been the main destination for U.S. LNG exports, accounting for almost half of the total exports. 

U.S. LNG exports averaged 11.5 billion cubic feet per day (Bcf/d) during the first four months of 2022, an 18% increase compared with the 2021 annual average. The increase in U.S. LNG exports was driven by additional export capacity at Sabine Pass (Train 6) and Calcasieu Pass (first five blocks) that came online this year and by high LNG demand, particularly in Europe.

Since December 2021, the European Union (EU) and the United Kingdom have been importing record-high levels of LNG, primarily because of low natural gas storage inventories. High spot natural gas prices at the European trading hubs incentivized global LNG market participants with destination flexibility in their contracts to deliver more LNG supplies to Europe. Additional LNG imports in Europe and a mild winter offset lower natural gas pipeline imports from Russia.

The United States became the largest LNG supplier to the EU and United Kingdom in 2021, accounting for 26% of total imports. In the first four months of 2022, LNG imports from the United States to the EU and the United Kingdom have more than tripled, compared with 2021, averaging 7.3 Bcf/d and accounting for 49% of total imports, according to data from CEDIGAZ. LNG imports from Russia and Qatar accounted for 14% each (2.1 Bcf/d).

During the first four months of 2022, U.S. LNG exports to Asia declined by 51%, averaging 2.3 Bcf/d compared with 4.6 Bcf/d (annual average) in 2021. China and South Korea were top destinations for U.S. LNG exports in 2021. This year, however, China received only six LNG cargoes from the United States in January–April 2022 (0.2 Bcf/d, compared with 1.2 Bcf/d in 2021) because of pandemic-related lockdown measures, as well as a mild winter and high LNG spot prices, reduced demand for spot LNG imports. U.S. LNG exports to South Korea and Japan also declined by 0.6 Bcf/d and 0.5 Bcf/d, respectively.

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Phil Flynn

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