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 United States wisely rejected all the additional conditions requested by Iran in their response to the JOCPA nuclear deal and urged Iran to lift any restrictions on international inspections of their nuclear facilities or other suspected sites. The United States also rejected allowing Iran to enrich uranium beyond the purity level of 4%.
At least the Biden administration got this one right. Perhaps they had a rare moment of clarity or perhaps it was because of the pressure from the Israeli government that made it clear that they would not accept this watered-down version of the JCPOA nuclear deal. The JCPOA nuclear deal was flawed in the beginning and this resurrected version was even worse.
Oh sure, the Europeans wanted a deal. They are desperate for more energy because they are facing the consequences of their bad policy over the last 20 years. Europe of sold its energy soul to the green energy movement and that has allowed Vladimir Putin to use energy as a weapon of coercion against the entire continent. Despite Biden’s claims that a deal with Iran would somehow void the country from getting a nuclear weapon, that’s completely unfounded and the desire should get into this type of deal smacked of politics and was not in the best interest of the world.
Oil prices soared on reports that the US-Iran rejection of the Iranian terms that might be giving this market a floor is the fact that more OPEC countries are sending signals that the cartel is getting ready to cut production. As we talked about yesterday and now today reported by the Wall Street Journal, OPEC president Saudi energy minister Abdulaziz almost doesn’t take market volatility into consideration in line with our views and objective and it’s open to cutting oil production.
There is no doubt that there have been times when the futures prices and the physical market have seen incredible disconnection. In some cases, there have been reports where people are trying to buy oil even at a premium to what the spot futures price are saying and can’t find the product. We’ve seen the liquidity in the futures market, especially in August, drop to historic lows. Hedge funds either went on vacation or just became downright scared to trade oil because of the uncertainties surrounding the Fed raising interest rates and the potential for this Iranian nuclear deal. Yet if traders followed the supply side, they realized that the sell-off that we saw in the first two weeks of April was probably unjustified if not downright dangerous.
The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.3 million barrels from the previous week. At 421.7 million barrels, U.S. crude oil inventories are about 6% below the five-year average for this time of year. Total motor gasoline inventories are virtually unchanged from last week and are about 7% below the five-year average for this time of year. Distillate fuel inventories decreased by 0.7 million barrels last week and are about 24% below the five-year average for this time of year. Propane/propylene inventories are virtually unchanged from last week and are about 11% below the five-year average for this time of year. These numbers are not comfortable as we go into winter.
We saw a total blowout of the heating oil gasoline spread yesterday as the EIA reported another inexplicable drop in US gasoline demand but at the same time put out numbers that suggested that distillate supplies are not going to be adequate to get us through winter. Implied gasoline demand fell to what would be a 20-year low if you believed the numbers in this wildly swinging weekly demand report. U.S. production fell, raising concerns that the U.S. producer is being held back by the Biden administration.
Energy secretary Jennifer Granholm is gonna be very disappointed with the U.S. energy industry yet again. She called on energy companies to reduce their exports. Last week U.S. exports of petroleum products hit a record high of over 11 million barrels a day. What is crazy about the Energy Secretary’s call on energy companies to reduce export is that it is in direct conflict of the Biden policy of promising Europe to export as much liquefied natural gas as they can. The US vowed to help them out during the Ukraine-Russian conflict. Biden vowed to send every molecule of the natural gas we can to help them out. Maybe, Biden and Energy Secretary Granholm should spend more time talking together.
The EIA also said that U.S. natural gas prices saw record volatility in the first quarter of 2022. The EIA says that annualized percentage, a widely used trading measure of price volatility, is the standard deviation for the previous 30 days of daily changes in the Henry Hub front-month futures price multiplied by the square root of 252 (the number of trading days in a year) multiplied by 100. Percentages are averages for that period.
U.S. natural gas price volatility (a measure of daily price changes) reached its highest level in 20 years, hitting record highs in the first quarter (January–March) of 2022. The 30-day historical volatility of U.S. natural gas prices, which is based on the U.S. benchmark Henry Hub front-month futures price, averaged 179% in February compared with 57% during the first quarter of 2021.
Historical volatility is a measure of daily closing price changes for a commodity at a specific time in the past. During July, historical volatility was lower on a percentage basis, in part, because natural gas prices were relatively higher than during the first quarter of this year. The Henry Hub front-month futures price averaged $7.19 per million British thermal units (MMBtu) during July compared with an average of $4.46/MMBtu during February. Natural gas price volatility averaged 124% during the first quarter of 2022 and 75% during the second quarter. Increased uncertainty about market conditions that affect natural gas supply and demand can result in high price volatility.
As we said earlier last week the market is probably bottomed. Even though gasoline has been beaten up, it’s probably time to look at that as well. We think the extreme spread between the heating oil and gasoline should come back into line a bit and we think it will be RBOB that will catch up to the heating oil.
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