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
They’re caught in a trap; they can’t pull back. So they release more oil baby. Why can’t they see that the oil’s not free, and you can’t control prices anyway? That can’t go on much longer we are in a bind. And we can’t build our dreams, leading from behind.
If at first you don’t succeed, release more oil. The Biden administration still doesn’t get the fact that the release from the Strategic Petroleum Reserve (SPR) failed to control oil prices. They are facing up to the reality that because they did not allow the market to work it out, that now you must keep feeding the monster. It’s kind of like the little shop of horrors. When you start giving the market a little bit of blood it’s going to want more and more and more, and it will never be truly satisfied. This is especially true because the Strategic Petroleum Reserve was never meant as a vehicle to control prices and if it was, then the size of the SPR was totally inadequate for the job.
Now after drawing down SPR inventories to the lowest level since 1982 after releasing 165 million barrels of its 180 million barrels release, Bloomberg news is reporting that the Biden Administration is planning to release an additional 10 to 15 million barrels over and above the 180 million barrels that have been promised and mostly delivered. Yet, the original intention of the Biden administration tapping the reserve was last November and that was to lower gasoline prices allegedly and to send OPEC plus a message.
Too bad the Biden administration isn’t getting the message because if you look at the price of gasoline it is still 54.5 cents higher than a year ago before the Strategic Petroleum Reserve releases began. Now the Biden administration showed anger and disappointment at Saudi Arabia accusing them of coercing other members to cut production. Those other members of the cartel did not see it that way and most in the cartel believe that the Biden administration is using Saudi Arabia as a scapegoat to cover for the coming drubbing that the democratic party is going to get in the midterm elections.
OPEC for their part could choose to wipe out Biden’s release with another production cut. Already the cartel says that they are concerned about slowing demand and with a rising dollar, they believe that they have to adjust their production to avoid a price collapse. If the OPEC cartel sees fit, they could easily offset another SPR release and probably will have the incentive to do so because the Biden administration hasn’t exactly been very diplomatic with Saudi Arabia or the rest of the cartel.
Under Biden, it’s obvious that geopolitical risk to oil supplies are higher than they’ve been since the terror attacks of September 11th and prior to that the Arab oil embargo. The Biden administration tried to engage Iran as far as its nuclear program is concerned and they also tried to reach out to Vladimir Putin to try to encourage him not to invade Ukraine and they failed on both counts. Russia and Iran have become emboldened under Biden’s leadership. Many experts attribute this rise in trouble from Russia and Iran date back to Biden’s ill-fated decision to withdraw from Afghanistan.
There are signs of Russian and Iran plans to double down on current activities. Iran and Russia must be expecting more sanctions because they want to start their own version of the SWIFT banking system. This comes as Ukraine is asking for more help as Iranian drones are attacking civilian targets in Ukraine allegedly being used by the Russians. I’m sure that the institution of this new making wire system means that Russia and Iran have more plans to cause havoc around the globe.
Recent weakness in the marketplace and oil has been attributed to the dollar and the potential release of Strategic Petroleum Reserve oil but at the same time diesel futures continue to be strong as the reality of tight supplies across the globe in winter right around the corner is keeping that market well supported.
We believe users of oil and gas need to continue to be hedged because we still see significant upside risks despite recent market weakness. The supply and demand side may kick in and signs that the economy might not be as slow as people fear could lead to a supply squeeze in just a couple of weeks. Releases from the Strategic Petroleum Reserve have not served to let the market work and allow supplies to meet demand as well as an uncertain regulatory environment by the Biden administration.
Natural gas took a big hit but it is overdone. The EIA reports that U.S. natural gas bills will increase in all regions this winter. They also reported that, “U.S. households that primarily use natural gas for space heating will spend an average of $931 on heating this winter (October-March), which is 28% (or $206) more than last year. Natural gas is the primary heating fuel for 47% of U.S. homes, according to the U.S. Census Bureau’s 2021 American Community Survey. The retail price of natural gas and the amount of natural gas consumed determine how much households spend on winter natural gas bills.
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