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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

Sometimes we all have second thoughts. It appears that the Biden administration may be having second thoughts about the wisdom of their Strategic Petroleum Reserve release. Joe Biden, who first released oil back in November to lower gasoline prices, is starting to worry about what’s going to happen when the oil reserves are drained and there’s an actual emergency.  The Biden administration started to use the strategic petroleum reserve for political purposes and now they realize that could backfire in a big way as inventories have been drawn down to historic lows and the risk of global supply disruption is higher than it’s been maybe ever.

Yahoo Finance reported that a Biden adviser just saying that the oil reserve releases need to end and we have to quit being a supplier to the rest of the world with our strategic reserve. Yahoo said that, “The Strategic Petroleum Release “was a stop-gap measure,” says Amos Hochstein, Biden’s Special Presidential Coordinator for International Energy Affairs. “We can’t be an oil supplier. It’s a reserve and so we have to keep that.” He vowed that ending the releases won’t spur supply shocks, noting that the private sector has assured him that it will be able to ramp up production once there’s no longer access to the reserve.

Amos Hochstein made the point of why we shouldn’t have released oil from the strategic reserve in the first place. He said the private sector confirmed they’d be able to ramp up production once there’s no access to the reserve. That would have happened even faster if it weren’t for the fact that the Biden administration intervened in the market and released oil for political purposes to lower gasoline prices and then double down on that strategy when it came to the war in Ukraine.

The Biden administration decided to export oil to help Europe which everybody knew would happen as soon as they released from the reserve but at the same time, it was a total misuse of what the Strategic Petroleum Reserve was made for. Today JODI reported that U.S. crude oil closing stocks fell in May to 938 MMbbl and are now at their lowest level since 2004. The SPR’s level has fallen to about 492 million barrels of oil, the lowest level since December 1985, according to the Energy Information Administration. That is a dangerous combination and has the Biden administration having second thoughts as to whether it was wise to use the Strategic Petroleum Reserve to bail out Europe and put the U.S. economy at risk. Perhaps the same type of second thoughts many Biden voters are having.

So it might be good news for Europe that the Kremlin says they have no interest in a total cut-off of natural gas supplies to Europe. Bloomberg reports that Gazprom will reinstall the repaired Nord Stream 1 turbine once it arrives in Russia and flows will resume at levels that are technically possible, the Kremlin spokesman. Dmitry Peskov told reporters on Monday, “The turbine will be installed after all the technical

formalities have been completed and the flows will be at the levels that are technologically possible” Russia is “not interested” in cutting off its gas supplies to Europe but this may change, “If Europe continues its course of recklessly imposing sanctions and restrictions that hit itself, the situation may change. But once again, Russia is not interested in this”  So Europe has that going for them.

Russian missile strikes in Odesa Sunday targeted military infrastructure in the port there and should not affect planned grain shipments. As far as grain goes Ukraine’s deputy infrastructure minister: We will be ready to work on the export of grain from all ports in the agreement within two weeks.

Oil prices overnight have been very erratic, to say the least. On Sunday night the market started on solid ground with reports that China’s covid lockdowns would be lessened a bit. Oil prices also were under pressure when it appeared that the EU was going to soften oil sanctions for private traders. There will be more time to comply so it would not disrupt the short-term oil market in Europe. The market is trying to balance the potential impact of high price demand destruction versus the current global supply shortages. Oil inventories around the globe are below normal and if the demand destruction is less than people anticipate, then we could see a huge move up in the price of oil. High prices are encouraging more production but that’s going to take some time and the use of strategic reserves will backfire because it gave the market a false perception that supplies would be adequate. When the reserve stops flowing, we’re going to see a shortage. The private sector would have responded faster if the reserve releases didn’t happen.

Natural gas opened on a tear and pulled back a bit. EBW Analytics says that record-breaking electricity demand and a sizably bullish EIA storage surprise led front-month natural gas to extend upward momentum—with Sunday night’s move higher now reaching a startling $3.00 / MMBtu upswing in under three weeks. In the immediate term, the further upside appears likely ahead of August contract options expiration and final settlement midweek. By early August, however, a long-overdue test of support could lead to weakness as the September contract assumes the front-month role.

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Phil Flynn

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