About The Author

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

Saudi Arabia has had enough. The Saudis are tired of the low liquidity in the oil market and the fact that the physical market has lost connection with the futures markets over the last couple of weeks. The Saudi Oil Minister is mad as heck and is not going to take it anymore. I can relate. They put oil traders on notice and are threatening to snap this low liquidity market back to reality.

They are also most likely signaling to the world not to expect an oil price crash even if sanctions are lifted on Iran, even though it is still not clear as to whether that will happen. Even as the State Department says that they are trying to move the world closer to an Iranian nuclear deal and that was two weeks ago. The political risk of the Biden administration getting into this deal is not good for everyone and could be the nail in the coffin for every democrat in the midterm election. Besides, the Israelis are totally against this deal stating it has crossed red lines that will not be acceptable to Israel and should not be acceptable to the United States. Yet the floundering, unpopular Biden administration is desperate for a win, any kind and so they may just do a deal, any deal, a bad deal just for political optics. Let’s face it, this administration is all about optics.

The Saudis put the fear of supply cuts into the market and took away traders’ fear of demand destruction, which hasn’t happened yet. Even though some argue that slowing demand in China and moderating demand in the United States is a sign of greater demand destruction to come, the reality is that the inventories around the world don’t reflect that fact. The oil market also isn’t reflecting the fact that global spare production capacity is at historic lows and the market is not reflecting the fact that there is an incredible risk to supplies. Russia controls the spigot and can cut off supplies of natural gas to Europe forcing them to use more oil.

Saudi Arabia energy minister Prince Abdulaziz bin Salman clear-voiced his frustration by saying that the, “Paper oil market is falling into a continuous vicious circle of verily thin liquidity extreme volatility undermining the markets vital function of an efficient price discovery. He says that OPEC has the resources to deal with market issues including the ability to cut production at any time and in many forms.”

He pointed out that the oil market is virtually ignoring spare production capacity on the globe and that the physical market and the paper markets are increasingly disconnected. He said that OPEC plus may need to cut production to stabilize the market.

Yet is his frustration based on fact. We do know that the physical market is about as tight as it’s ever been. Spare oil production capacity at historic lows. The problem is that the market seems to signal that they expect a major drop-off in demand in the future. Is that demand drop in the future being overstated?

We do know that the market is focused on the Jackson Hole conference with Fed Chairman Jerome Powell expected to speak on Friday. We do know that the market is facing a rising interest rate environment that some fear will push the globe into a recession killing the oil demand. While the economy could collapse, or China could drag down the global economy, the truth is we’re not seeing any signs of that major demand destruction event yet. I am not saying that it couldn’t happen but with supplies as tight as they are going into winter and record-breaking natural gas prices in Europe, not to mention the risk that the Russians could cut off European supply at any moment, we think the price of oil has been too complacent.

I think the market expectation of a quick return of Iranian oil supplies back to the market is still overly optimistic. The US State Department said yesterday that the United States is encouraged that Iran appears to have dropped some demands such as lifting the terrorism designation for the Islamic Revolutionary Guard Corps (IRGC.)  How nice of them.

Israel though is not happy. Axios reported, “The Biden administration in recent days has been seeking to reassure Israel that it hasn’t agreed to new concessions with Iran and a nuclear deal isn’t imminent, the U.S. and Israeli officials told Axios. Yes, but: Israeli officials said they‘re not reassured. State of play: Iran gave a formal response this week to a “final” proposal from the EU, which has been mediating between the U.S. and Iran. That increased speculation that a deal could be close, and led to friction between the U.S. and Israel, which opposes a restoration of the 2015 nuclear deal.

The Israeli concerns were exacerbated by the fact that the country is currently in an election campaign. If a nuclear deal is announced ahead of the November election, it could give political ammunition to opposition leader Benjamin Netanyahu to use against Prime Minister Yair Lapid. Driving the news: Over the last week, White House officials assured their Israeli counterparts that despite claims in the press, there have been no new concessions to Iran, U.S. officials said. But last Thursday, senior Israeli officials briefed reporters that Lapid had told the White House that the EU draft goes beyond the 2015 deal and crosses the Biden administration’s red lines.

Behind the scenes: The press reports surprised the White House, which on Thursday and Friday sought to reassure the Israelis once more that it wasn’t the Biden administration offering concessions but Iran, which dropped its demand the Revolutionary Guards be removed from a U.S. terror blacklist. “A deal might be closer than it was two weeks ago but the outcome remains uncertain as some gaps remain. In any case, it doesn’t seem to be imminent,” a U.S. official told Axios, describing the message that was given to the Israelis.

Yet deal or no deal truth is at the markets going to have to face some realities. One reality is that even though we saw a huge weekly release from the Strategic Petroleum Reserve, more than likely we’re going to see crude oil supplies fall again this week. The U.S. SPR released 8.1million barrels of oil last week dropping inventories to just 453.1 million barrels. Of that, 5.7 million barrels of crude was sour which yields most of the distillate that we are short of. Most of that was exported, leaving the U.S. vulnerable if we have a disruption of supply.

With the Saudi put in place, it is going to be very difficult for oil prices to make new lows. We should start to see the market attempt to break out of its downtrend and it could put us back on a target to get oil back above $100 a barrel by October. The market needed a reality check and they may get one. I much rather have it be from a threat from Saudi Arabia than some type of light-volume bearish fantasy that could discourage the production of oil and gas when we most desperately need it.

Even though the temperatures are cooling, natural gas prices sure are not. Natural gas prices surged above $10 a million metric BTU last night for the first time since 2008 record-breaking prices in Europe as well as the fact that United States supplies are below average going into winter causing a buying frenzy in the world’s cleanest burning fossil fuel. Russia is sending a reminder to the world that they still control Europe’s supply of natural gas by announcing a pipeline shutdown for “maintenance”. Reuters reports that Russia’s natural gas supplies to Europe are down around 75% year on year, with export company Gazprom last week announcing unscheduled maintenance on the Nord Stream 1 pipeline, which runs under the Baltic Sea to Germany.

This is a wake-up call to Europe and the rest of the world. Bad energy policies mean a very high probability that they’re going to have energy shortages in many parts of Europe this winter. Let’s pray for a mild winter so people do not freeze to death. Let’s also pray for common sense in this country that we don’t repeat the mistakes that Europe has made when it comes to energy. We are hearing about some very foolish policies that are going to leave the country vulnerable both economically as well as from a geopolitical standpoint. Let’s quit making energy policy based on climate alarmism and face up to the realities that Americans have to live with. Every day let’s make energy policy based on fact and based upon the green energy lobby that has secured billions of dollars from both Europe and the United States. Just a few years ago when we talked about the coming energy crisis people were very skeptical and now it’s here and the globe is facing its worst energy crisis in history. While recent market action may give us a sense of security, the risk for oil and natural gas are still on the upside. Be prepared.

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Thanks,

Phil Flynn

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