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
OPEC is getting ready to send a message to the Biden administration that they’re going to lose the oil war that they started with the cartel last November. The Biden administration tried to send a message to OPEC that if they wouldn’t raise oil production when they wanted them to, then they would release oil from the Strategic Petroleum Reserve. Well since then we’ve had the war in Ukraine, and we’ve had the Biden administration doubling down on releasing oil from our reserve sending supplies to the lowest levels we’ve seen since 1984. US SPR crude inventories fell by 6.2mb to 416. million barrels last week.
In March the Biden administration announced the largest-ever release of oil from the United States’ strategic reserves releasing an average of 1 million barrels per day for six months, resulting in a total release of about 180 million barrels. Now it’s about to end the historic release at a time when OPEC is planning to send a message back to the Biden administration that they control their own oil destiny.
OPEC has been dropping hints all week that they will make a major oil production cut at the first in-person OPEC meeting since covid in Vienna on Wednesday. Initially, the talk was cut between 500,000 barrels a day and a million barrels a day. Now there is talk that the cut could actually be 2 million barrels a day where Saudi Arabia would do a voluntary cut of 1,000,000 barrels of oil a day and the rest of the cartel would kick in another million barrels a day. A production cut like that would be viewed as cruel. Yet from OPEC’s standpoint, they believe that because of the slowing global economy and the intervention by the Biden administration in the oil market that the oil prices are out of whack with reality.
It is true that the Biden administration’s leadership with the strategic reserve releases have caused a dislocation in the physical oil market. That has led to price anomalies and interrupted the free function of the oil market. Now it’s time for OPEC’s revenge and a 2 million barrel a day production cut would be a slap in the face of the Biden administration.
Reports yesterday suggest that the joint technical meeting that’s normally held the day before an OPEC meeting was canceled. There was some speculation that it was canceled because they are getting pressure from the Biden administration and others not to make this huge production cut. Reuters reported it this way that, “OPEC+ canceled a meeting of its Joint Technical Committee (JTC) set for Oct. 4 ahead of a key gathering of ministers from the producer group to set policy, three OPEC+ sources told Reuters on Monday. The JTC advises the OPEC+ Joint Ministerial Monitoring Committee (JMMC) and the overall OPEC+ ministerial meeting on market fundamentals. One of the sources said the decision to scrap the JTC meeting came from the JMMC, without elaborating.
CNN reported that US Rep. Khanna is calling for the White House to retaliate against Saudi Arabia if OPEC and its allies cut oil production. “This is beyond the pale,” the California Democrat told CNN in a phone interview on Monday. “They are actively fleecing the American people and destabilizing the economy. That’s just outrageous. Who do they think they are?” I’ll tell you who they think they are. They think they are the head of a cartel that controls the global oil market. Along with their co-conspirator Russia, they have seized control of this market because of policies that you Representative Khanna supported. Your anti-fossil fuel agenda and standing in the way of US oil and gas production has given Saudi Arabia, this government you call a third-rate power, more control of the US economy.
It also might be viewed as insensitive by Saudi Arabia that you think you can dictate to that country what they should do with their oil production. I know you have the power to influence laws in the United States that can reduce oil production but you can’t force other countries to raise production. It doesn’t work that way. Representative Khanna says that Saudi Arabia is actively fleecing the American people and destabilizing the economy. Well I would argue that your energy policies made us more dependent on Saudi Arabia. I would also argue that the money that you’re throwing at green energy have fleeced the American people and helped destabilize their economy.
Representative Khanna is putting the pressure on Saudi Arabia to take the focus off of his party’s energy policies. The reality is that global spare oil production capacity is tight and in large measured to shortsighted green energy policies with the green energy movement that has discouraged investment in fossil fuels and has helped lead to a global spare production capacity that is a growing risk for the global economies going forward.
Reuters reports that, “The oil market is not focusing on the fact that global spare capacity to raise oil production is very low, Saudi Aramco’s Chief Executive said on Tuesday, with Shell’s Chief Executive saying investments will not shift because prices are high.”(The market is) focusing on what will happen to demand if a recession happens in different parts of the world, they are not focusing on supply fundamentals,” Aramco Chief Executive Amin Nasser said at the Energy Intelligence Forum in London.
Yesterday could be the final bottom for oil. For the first time, we completed the process and closed over the key resistance which yesterday we pegged at 8270. Data in the US which seemed to suggest the Fed could back off the regressive rate hike cycle is giving the market a little bit of confidence that there’s light at the end of the tunnel and that may be a recession will not be that deep. If that is the case, then oil will resume its track back up towards $100 a barrel.
We’re also seeing strength in products such as heating oil and RBOB gasoline. The inventories of those are below average and with a slew of refining issues around the country, we’re seeing the impact at the gasoline pump and the diesel pump crack spreads should start performing better.
Natural gas futures are getting caught up in seasonal weakness and high production. We still think the long-term outlook for natural gas is very bullish but short term we’re going to have to get over the shoulder season to start getting a clear breakout.
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