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
Europe and mainly Germany trusted Russian President Vladimir Putin to be a reliable supplier of oil and natural gas but now are paying the price for that naivete. Now it is Russian President Putin that says that “trust in the dollar, euro, pound, has been undermined as he announced that the last operational Nord Stream 1 turbine is out of order. The Russian President says that Nord stream One is practically shut down and said he can launch Nord Stream 2 pipelines if necessary but claims that he needs Europe to send him a turbine before he can act. Putin also says that the proposed price caps on Russian gas is “stupid and will lead to price increases.” I have to say on this point I do agree with the Russian President.
Germany Chancellor Olaf Scholz says that Russia doesn’t want to deliver gas and the leak is just an excuse. He says that the winter will be challenging for Germany, but they will manage to get through it.
Russian President Vladimir Putin for his part says we have no problems with selling energy resources and we are ready to cooperate with any country on energy. At the same time, it’s clear Russia plans to use its energy dominance over Europe as a political weapon and while the so-called price cap may give people the illusion that prices are going to stay lower, ultimately it’s going to lead to shortages. The lack of investment will cause Vladimir Putin to double down on his aggressive strategy of withholding supply from Europe.
WTI oil prices seemed to be selling off before the announcement by Putin that the Nord Stream 1 pipeline was practically shut down and fears of a slowing economy. More China lockdowns due to covid and general economic malaise fears weakened prices as well. After Putin’s comment, the market seemed to reverse course in its extremely volatile moves that we’ve seen over the past couple of days.
Oil prices in recent days came under pressure as the dollar started to rally despite Putin’s lack of confidence in the old greenback. Our prices also saw some pressure and expectations that we may see a big increase in crude oil supply this week.
The strategic petroleum reserve reported that they released 7.5 million barrels of oil last week reducing the amount of supply down to 442.5 million barrels. There was 1.7 million barrels of that oil released was sour and 5.9 million barrels was sweet. That’s a big number. The thing you have to remember is that the faster they drain the amount allotted from the president for supply the faster we start to see just how dramatically our supplies may fall without the help from the SPR.
Diesel prices also plummeted yesterday after it was reported that the BP refinery was back up to full operation. This is good news for people who are concerned about heating oil bills this winter and let’s face it because supplies are so far below average we need all the help we can get.
Natural gas prices absolutely plummeted as tropical storm threats seem to boomerang and missed the Gulf of Mexico while the weather forecast calls for more mild temperatures and reduced demand for natural gas. At the same time, the Freeport LNG export terminal is still shut down and no new updates as to when it will restart.
Natural gas production has been relatively strong and that has also been a negative factor. Still in the big picture supplies are well below average and if we get any weather we could reverse course once again. I will remind hedgers that this sell off in price is more than likely a good opportunity to lock in your hedges while the market seems to be focused on some weakness due to the shoulder season and economic concerns. The reality is that the supply side is just too tight to take chances. We would recommend some type of hedge because we’re only one more disaster away from seeing the supply side start to take charge of the prices. On top of that if we ever see a reopening in China, the demand will exceed daily production levels. The other thing is that OPEC is sending a clear signal that they want prices higher than they are despite the modest 100,000 barrels a day production cut. It’s a signal to the market that they are not going to stand idly by and allow prices to collapse.
Californians looking for help with their energy crisis yet rolling blackouts look very likely. The California Independent System Operator (ISO) has issued an Energy Emergency Alert (EEA) 3, t, as electricity supplies run low in the face of record heat and demand. If necessary, the grid operator can now order rotating power outages to lower demand and stabilize the system. If outages are initiated, consumers can expect to receive notifications from power providers on areas affected and time duration. I hope they got their electric cars charged in time.
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