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 Russian ruble is breaking out to the upside as Europe continues to buy Russian oil and gas and give into Russian President Putin’s demands to be paid in the Russian currency. It appears that Putin’s plan to use oil and gas as a political weapon, and despite the so-called tough sanctions imposed by the US and Europe, for right now Russian President Putin is laughing all the way to the bank. A report from the independent Finland-based Centre for Research on Energy and Clean Air (CREA) as reported by Agency French Press shows that Russia’s revenues from exports of oil and gas reached record highs during the first 100 days of the war, with Moscow taking in 93 billion euros ($98 billion), most of it from European Union customers. No wonder the chart on the ruble makes it look like one of the best-performing currencies in the world.
Still, the U.S. is continuing to send oil to Europe with another record-breaking 7.7-million-barrel release from the Strategic Petroleum Reserve. U.S. oil exports to Europe will show a big increase this week. Yet despite these efforts, supplies in Europe are still tight because of years of bad energy policy and the short-sighted rush to get off of fossil fuels. What is making things worse is political turmoil in Libya that is costing the globe about 1 million barrels of oil a day at a time when the world can least afford it. I think it’s nice that Biden is being very generous in pushing for the US to export more oil and natural gas to Europe. Yet then I wonder why he has policies that continue to stand in the way of US oil and gas producers. I also wonder why he continues to disparage the industry and make fake accusations as far as not drilling and price gouging. Perhaps he should apologize to the union oil workers when he gives his speech to the AFL-CIO Constitutional Convention.
Because, at the end of the day, it’s still about supply and demand and right now we have a global supply-side structural shortage. Oil prices shook off concerns of a potential shutdown in China and a sinking stock market because physical buyers will buy dips in price to secure supply. The market also knows that even if the Fed does raise interest rates by 75 basis points as the market has priced in, that doesn’t necessarily mean there will be that much less demand for oil at least not right away and we know that the supply side is not being met right now. This comes as world oil demand growth will slow in 2023, OPEC delegates and industry sources said, as surging crude and fuel prices help drive up inflation and function as a drag on the global economy according to Reuters.
Still, John Kemp at Reuters points out that, “U.S. INTEREST RATE traders expect the federal funds rate to reach 3.50-3.75% by January 2023 up from 0.75-1.00% at present as the central bank attempts to bring inflation under control. If they prove necessary, increases on this scale would result in a significant slowdown in the business cycle.”
Yet that still does not solve the structural problem. As we’ve mentioned before, the back end of the curve is still trading at a discount, but the back end of the oil curve still looks like it is undervalued. We believe that oil prices are going to be higher for a longer which means that there is some value in the back end of the oil trading curve.
Europe is also in desperate need of natural gas. Bloomberg News reports that Europe’s plan to quit Russian fuel plunges Pakistan into darkness. They report that power outages across South and Southeast Asia are linked to policies enacted thousands of miles away. “A global energy crunch has resulted in LNG spot prices surging to levels that are too high for cash-strapped nations like Pakistan. The South Asian nation purchased its most expensive LNG cargo ever in November after a similar cancelation and has avoided additional purchases since then. Pakistan is “carefully” analyzing its gas shortage and will purchase cargoes depending on the prices they receive, Pakistan LNG said in its reply. It’s looking for the cargoes to be delivered between March 2 and March 3 and from March 10 to March 11, the people said. The offers are due on Feb. 22.
Yet the U.S. has had a glitch sending LNG to Europe because of the explosion and fire at the Freeport LNG terminal. Exports might be offline for three weeks. RBN Energy wrote that the explosion on June 8 at Freeport LNG, the 15.3 MMtpa (2 Bcf/d) export terminal on Quintana Island, TX, has knocked it offline at a time when the global market is already facing tight conditions because of the war in Ukraine and other factors. The explosion, fire, and subsequent shutdown — which fortunately did not include any injuries — sent U.S. natural gas tumbling off recent highs and shot global gas prices higher.
RBN says that much is still unknown about the developing situation, including exactly how long the outage will last. While Freeport has said it expects the terminal to be offline for at least three weeks, multiple regulatory agencies have investigations underway and will likely need to approve a service return. RBN Energy reported information about the incident has been trickling in as investigations got underway by state and federal regulatory agencies, including the Pipeline and Hazardous Materials Safety Administration (PHMSA), which typically oversees major incidents, such as the storage tank leaks at Sabine Pass and the multiple ruptures on Texas Eastern Transmission (TETCO) in 2019-20. In a filing to the Texas Commission on Environmental Quality (TCEQ) last Wednesday, Freeport said it had to shut down all three of its liquefaction trains and their respective pre-treatment facilities due to a fire in the liquefaction delivery system. From preliminary reporting, it appears that a line, presumably a vapor and not a liquids line, near the storage tanks, may have been the source of the explosion. PHMSA said Friday that there were early indications of a leak in the piping in that area and that it will take “a while” to complete the investigation.
Bloomberg reported, “PHMSA has the authority to oversee the terminal’s return to service, which may mean that it will take longer than three weeks to restart operations. Additionally, the extent of any damage is not yet known, and if new parts are needed, that might present a problem, given the issues with the global supply chain related to the pandemic. A May 2020 fire at Kinder Morgan’s liquefaction terminal, Elba LNG in Georgia, took one of its mini-trains, Unit 2, offline for about 18 months because Kinder Morgan had a difficult time procuring parts needed to repair the damaged unit.
In the meantime, this is holding back natural gas prices that would have been soaring because of a major heat wave in many parts of the country.
Gasoline and diesel prices continue to break records even though we are seeing signs on the futures end that we may be coming to a point where prices should stop going up AAA reported that regular unleaded hit $5.016 a gallon and diesel $5.775 a gallon.
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