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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

Admitting you have a problem may be the first step in solving it. Yesterday oil prices got a boost when Biden officials reportedly admitted that we could see a major oil price spike in December unless other measures are taken. The Biden administration is fearful that the EU ban on Russian oil supplies could cause a major oil price spike, so they are weighing other options such as additional release from the Strategic Petroleum Reserve. Yet this is in direct opposition to a release by the Treasury Department when they tried to suggest that they had the answer to the looming December price spike. It’s called price caps. They mocked people who questioned whether price caps would work and tried to convince us all that this policy is the answer to the oil shortage problem. Yet they say one thing and worry about another.

The Treasury Department boasted that, “Last week’s bold announcement by the G-7 of a price cap on purchases of Russian oil has met with skepticism and ridicule from media commentators and pundits. Following months of planning, the oil price cap is a bid to limit the Kremlin’s earnings on exports of its most important commodity and reduce financial support for its war against Ukraine. After the G-7 announcement, the Kremlin immediately said that Russia would not sell any oil to countries abiding by the price cap. The critics contend the scheme will never work—but they are wrong.”

If we are wrong, why is the Biden administration preparing for a December oil price spike? If we are wrong, then why is the Biden administration talking about draining our already depleted supply of SPR oil? The Z-Man Energy Brain points out that SPR oil supplies will soon fall below commercial inventories very shortly raising real concerns if we get a major oil disruption. If we take it one step further, why doesn’t the Biden Administration, if they believe that price caps work, end our inflation problem by capping the price of everything? That would theoretically then end Biden’s Inflation problem. Of course, Biden has had a hard time admitting he has a problem. He also has a hard time admitting that his policies have had anything to do with inflation. They will not admit they know that price caps disrupt market forces and lead to shortages.

Reuter reports that, “The price cap that G7 countries want to impose on Russian oil to punish Moscow should be set at a fair market value minus any risk premium resulting from its invasion of Ukraine, a U.S. Treasury Department official told reporters on Friday. The price should be set above the marginal production cost of Russia’s oil and take into consideration historical prices, said Elizabeth Rosenberg, U.S. Treasury Assistant Secretary for Terrorist Financing and Financial Crimes. She also said that “The price cap price should be … inline or consistent with historical prices accepted by the Russian market. “That could imply a potential cap of around $60 a barrel, experts say, as Russian Urals crude, based off of the benchmark Brent, sold for $50 to $70 a barrel in 2019. Russian government documents have identified a marginal crude production cost of $44 per barrel, although some Western officials believe it may be somewhat lower according to Reuters.

Yet the Biden Treasury Department asks the obvious question, “Won’t any price cap be undermined by countries not participating in sanctions?” They answer, “Critics argue that India, China, Turkey, and many other countries will never go along with a price cap—and that an oil price cap that isn’t global will never work. While it’s true that many countries likely won’t officially sign on to the cap, they don’t need to for the plan to work. That’s because the critics ignore the fact that nonparticipating countries’ goal is to get the lowest price for buying oil, and the price cap will give them additional leverage in their negotiations with Russia. Already, India, China, and other developing nations are buying Russian oil at an unprecedented discount of as much as $30 per barrel. Russia is so desperate to find buyers of its oil that it is offering long-term, fixed-price contracts at a massive discount to try to lock in at least some future revenue.

So they are counting on Russian desperation. It seems the Biden Treasury Department is daring Russia to cut off oil supply almost like they dared them to invade Ukraine and hit them with tough sanctions that were supposed to deter an invasion until it did not and then said that sanctions were never meant to deter an invasion. They ask, ”Won’t Putin just stop selling oil, as he has threatened to do? They answer their question by saying, “It is important to call Putin’s bluff. Although the Kremlin has declared that Russia will refuse to supply any country that participates in the price cap, energy exports make up more than half of Russia’s total government budget in most years. With Russia’s revenues from natural gas already set to decline significantly, Putin cannot genuinely afford to shut off his country’s oil spigots while its economy reels from the ever-increasing costs of the war.”

So while the Treasury Department is daring Vladimir Putin to cut off supplies and call his bluff, the Biden administration is scared about a potential price spike. This disjointed economic policy has been a bellwether of this administration. It also is going to be very dangerous and leave the world vulnerable for a major winter price spike. At the same time, the world is being threatened by bad energy policy and the lack of fossil fuels, this administration continues to double down on its green energy agenda discouraging fossil fuel productions on federal lands putting tougher regulations on producers leaving the economy and the poor more vulnerable this winter.

As far as Russia goes, they are saying that the price cap will be the West’s undoing. Reuters reported that, “Russia warned the West on Friday that plans to try to cap the price of Russia’s oil and gas exports in retaliation for the war in Ukraine would fail and ultimately lead to the instability of the United States and Europe. The confrontation over Ukraine has prompted European Union customers to reduce their purchases of Russian energy while both the G7 and the EU are trying to impose a price cap on Russian oil and gas. 

Just before the EU announced a price cap on Russian gas on Wednesday, President Vladimir Putin threatened to sever supplies if such limits were imposed, warning the West it would freeze like the wolf’s tail in a fairy tale. The Group of Seven major industrialized countries wants to impose an oil price cap that would deny insurance, finance, and brokering to oil cargoes priced above a yet-to-be-set price cap on crude and two oil products.

Oil prices are also getting a boost as the dollar starts to retreat. Federal Reserve Chairman Jerome Powell seems to calm fears that the Fed was going to go crazy raising interest rates and had no plans to increase interest rates more than the 75 basis point increase price in.

The oil charts also seem to give a bottom signal closing back above the all-important support line yesterday after failing to follow through on a new low that they made in early morning trading. Extreme volatility remains yet the tight supply situation should overtake the economic fears, especially with winter right around the corner.

Natural gas prices also reversed. Natural gas sold off a bit on concerns that LNG exports could be thwarted by the EPA cracking down on natural gas exporters. Reuters reported that, “The Biden administration denies Cheniere’s request to sidestep LNG pollution rule “- The U.S. Environmental Protection Agency (EPA) said on Tuesday it has denied a request from leading liquefied natural gas (LNG) exporter Cheniere Energy Inc LNG.A to exempt turbines at its two U.S. Gulf Coast terminals from a hazardous pollution rule. The rejection raises questions about whether the Texas-based company will have to reduce exports of the supercooled fuel to install new pollution control equipment at its facilities at a time when Europe is depending on increased shipments of LNG from the United States to offset cuts from Russia. Cheniere spokesperson Eben Burnham-Snyder said that while the company “strongly disagrees” with the EPA’s decision, “we will work with our state and federal regulators to develop solutions that ensure compliance.”

Still natural gas seems to be supported even as the weather outlook is going to be bearish and the shoulder seasons injections will rise in the coming weeks but the question is whether or not that’s going to be enough to soothe market prices in an environment where the world is facing shortages.

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Phil Flynn

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