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 world has descended into energy madness. We have seen the good intentions of the green energy movement pave the way to energy hell in Europe. We have the President of the United States and the Governor of California, despite seeing the carnage in Europe, continue to support energy fantasies at the expense of the most vulnerable people in society. We see Europe trying to put a price cap on Russian oil and gas that will only lead to shortages, and we have seen OPEC Plus send a subtle message sending a 100.000 barrel-a-day production cut. We have the President of the United States still so desperate to try and cut a deal with the Iranian regime and he’s even sending messages to Venezuela that we might want to lift sanctions to get more oil. Yet at the same time Biden has reduced drilling on federal lands to an all-time low for any president in modern history.
The Wall Street Journal reported that, “the Biden administration has leased fewer acres for oil-and-gas drilling offshore and on federal land than any other administration in its early stages dating back to the end of World War II, according to a Wall Street Journal analysis. Biden’s Interior Department leased 126,228 acres for drilling through Aug. 20, his first 19 months in office, the analysis found. No other president since Richard Nixon in 1969-70 leased out fewer than 4.4 million acres at this stage in his first term. Harry Truman was the last president to lease out fewer acres—65,658—in 1945-46, when offshore drilling was just beginning and the federal government didn’t yet control the deep-water leases that have made up the largest part of the federal oil-and-gas program in modern times.
The FT reported that, “The EU’s chief diplomat has said that efforts to strike a new agreement on Iran’s nuclear program are “in danger” after the US and Iranian positions diverged in recent days. Joseph Borrell, who chairs the indirect negotiations between Washington and Tehran on reviving the 2015 Joint Comprehensive Plan of Action (JCPOA), said on Monday that he was losing confidence in finding a deal. In his most pessimistic remarks since he sent both sides a “final draft” of a possible agreement last month, the EU’s high representative for foreign and security policy said: “The positions are not closer . If the process does not converge, then the whole process is in danger.” That is according to the FT.
Fears of total economic collapse and more China covid shutdowns are taking away the gains we saw over the weekend.
Oil prices are on a wild ride after OPEC sends a message by cutting its output by 100.000 barrels a day and Europe and California feel the pain from their shortsighted and damaging energy policy. There is an energy emergency in Europe and California because of hot temperatures. They are begging people not to charge electric cars that they encouraged people to buy.
California now has a 2035 deadline for all new cars, trucks, and SUVs sold in the state to be powered by electricity or hydrogen. Yet the power grid in California can’t even keep the lights on now let alone be able to charge more electric cars in the future. The power grid just doesn’t have the capability in California to handle that type of load.
Bloomberg News reported that, “California narrowly avoided implementing rotating outages on Monday while officials warned that the state’s power grid will face a bigger test on Tuesday amid a record-breaking heat wave. The state’s grid operator canceled its grid emergency late Monday evening after deploying supplies that helped keep the lights on even as electricity use soared to its highest level in five years.
Oil prices continue to see wild volatility surging over the Labor Day holiday weekend on OPEC cuts only to fall back on worries about more China covid shutdowns. The new UK Prime Minister Liz Truss is shaking up markets after she plans government loans to fund an 18-month energy price freeze this comes as Europe tries to institute a price cap.
The price cap probably caused Russia to find problems with the Nord Stream One Pipeline. The price cap is one of the reasons why OPEC decided to decrease production. Bloomberg Reports Energy bills for European households will surge by 2 trillion euros ($2 trillion) at their peak early next year, underscoring the need for government intervention, according to Goldman Sachs Group Inc. utility analysts. At their height, energy bills will represent about 15% of Europe’s gross domestic product, the analysts, led by Alberto Gandolfi and Mafalda Pombeiro, wrote in a note dated Sunday. “In our view, the market continues to underestimate the depth, the breadth and the structural repercussions of the crisis,” they wrote. “We believe these will be even deeper than the 1970s oil crisis.”
Energy madness may continue but the risks are still to the upside. We are fighting this battle against the concerns about future demand destruction versus a supply situation that is tight and getting tighter. If the demand destruction is smaller than anticipated, oil prices are going to go on an incredible ride. The bear case is that we’re headed towards economic catastrophe. The question for the bears is will oil prices spike before the economy falls apart.
Natural gas prices had a little pop and then a drop as we get into some seasonal weakness. As far as supplies go the market is still awaiting the reopening of the Freeport LNG export terminal. When that happens we expect to see natural gas put on an incredible run to new contract highs. Call for option strategies.
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