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 prices are pulling back after just coming one tick from breaking out to the upside on recession fears and Fed talk that is causing the dollar to rally and risk assets to pull back. While oil bears continue to root for a recession, the reality is that the world is facing a major energy crisis that isn’t going away despite recent oil price market weakness. European natural gas prices have surged to all-time highs raising the risk not only to the European economy but to the health and well-being of their people. While the Biden administration continues to blame Vladimir Putin for all of our energy problems and calls on OPEC to raise production, the new OPEC secretary general has a message to those who believe OPEC can bail them out of this mess.
In an online interview reported by Reuters, OPEC Secretary General Haitham Al Ghais of Kuwait said about the global energy crisis, “Don’t blame OPEC, blame your own policymakers and lawmakers, because OPEC and the producing countries have been pushing time and time again for investing in oil (and gas). What the OPEC Secretary General is saying is that the green energy movement was put together in a shortsighted way and is causing major problems around the globe. Biden’s fixation on green energy, which is favored by billionaires that will get even richer off of this transition while making the poor poorer and more vulnerable, it’s very evident in the inflation reduction act that magically became the green energy act.
Joe Biden, thanks for throwing a lot of money at green energy projects thinking he could save the world, and apparently Microsoft chairman Bill Gates is taking credit for twisting Senator Joe Manchin’s arm for going along with this inflation-increasing act. I call it that because it’s going to raise the cost of fossil fuels and discourage investment in the energy sector. Instead, it will invest taxpayer dollars in green energy windmills and solar panels and makes the assumption that’s why Bill Gates is buying all the farmland because he thinks he can make more money selling biofuels to America when the energy grid fails from too many electric cars.
Fed officials Esther George, James Bullard and Neil Kashkari spoke yesterday and I think it was Mr. Kashkari’s comments about the Fed being willing to do what it takes, even if it means pushing the economy into a recession, that’s causing oversee traders to drive up the dollar. Reuters reported that Minneapolis Federal Reserve Bank President Neel Kashkari on Thursday said the U.S. central bank needs to get “very very” high inflation down as soon as possible, even at the cost of possibly triggering a recession. “We need to get inflation down urgently,” Kashkari said at an event at the YPO Gold Twin Cities. “We need to get demand down” by raising interest rates. Economic fundamentals are strong, he said, but whether the Fed can lower inflation without sending the economy into a recession, he said, “I don’t know.”
Bloomberg reported that, “The market is digesting mixed policy signals from Federal Reserve officials on interest rates. St. Louis’s James Bullard urged another 75 basis-point moves while Kansas City’s Esther George struck a more cautious tone, saying the pace of hikes is up for debate. The dollar has also strengthened this week, adding to headwinds for commodities. Minneapolis Federal Reserve Bank President Neel Kashkari on Thursday said the U.S. central bank needs to get “very very” high inflation down as soon as possible, even at the cost of possibly triggering a recession.
This comes as the Wall Street Journal reported that, “U.S. existing home sales fell in July for the sixth straight month, the longest streak of declines in more than eight years, as higher mortgage rates and a shortage of homes for sale are cooling the market.
The other concern for oil traders is the possible return of Iranian oil. The market is waiting for the U.S. response to the Iranian proposal. The U.S. has been studying the proposal for two days and we’re not really getting a signal as to whether or not we are going to accept the terms that the Iranians want. Israel for their part has stated that the deal will be unacceptable because it will cross red lines that the Biden administration themselves put into place. Yet Biden is desperate for a diplomatic win, especially after the one-year anniversary of his disastrous pullout from Afghanistan that is reminding people of one of the biggest blunders from an American President in history.
The fundamental outlook for oil is still wildly bullish but the technical setup is still looking bad. As I mentioned previously oil almost completed the process of breaking out of the downward channel but failed to do so by just one tick. That keeps us in that downward channel and the technicians are able to drive prices lower with help from a rising dollar and recession concerns. My concern is that the market is underestimating how desperate the global supply situation is going into winter especially when it comes to distillate inventories. I am also concerned that low prices could discourage production at a time when it is desperately needed. Technically we would need to see a reversal of the market action to get the algorithms going to the bull side but at the same time, the risks or a major reversal to the upside are very real. Major downside risks, of course, are continued weak demand from China and the potential for an Iranian nuclear deal. As far as China goes, we believe that demand will snap back and we are still skeptical that an Iranian deal can get done anytime soon.
Natural gas prices hit a stunning high after a wildly bullish Energy Information Administration (EIA) injection number that came in well below market expectations. Yet it collapsed later on because people believe that prices were just too high and some profit-taking came in after a huge surge. U.S. natural gas production continues to disappoint and just leaving the market undersupplied going into winter. Yep, we are starting to see some profit taking develop.
Working gas in storage was 2,519 Bcf as of Friday, August 12, 2022, according to EIA estimates. This represents a net increase of 18 Bcf from the previous week. Stocks were 296 Bcf less than last year at this time and 367 Bcf below the five-year average of 2,886 Bcf. At 2,519 Bcf, total working gas is within the five-year historical range.
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