Turbulence. The Energy Report 10/24/2022

Oil prices continue to have trouble maintaining altitude as economic turbulence around the globe is shifting focus from the market being undersupplied to a potential economic crash. The Japanese yen, after being supported by the Japanese central bank, crashed as concerns about China’s President Xi Jinping consolidating power is raising concerns about their ambitions in the region especially when it comes to Taiwan. The former leader Hu Jintao, who was unceremoniously removed from the stage in the closing ceremonies, signaled to all of the critics of President Xi that they had better be careful. The economic turmoil in Japan that’s caused the resignation of Daishiro Yamagata. The Japanese Minister in charge of economic revitalization, handed in his resignation to Prime Minister Fumio Kishida on Monday.

Sunday night’s opening saw weakness in the dollar but that shifted as the night went on. Then strengthening in the dollar could also be attributed to the turmoil that we are seeing in the UK as they struggle to find a new Prime Minister and try to find an economic policy that can actually avoid the UK’s green energy inspired recession. Reuters reported that Rishi Sunak looked set to become Britain’s next prime minister after Boris Johnson withdrew from the contest on Sunday, saying that although he had enough support to make the final ballot, he realized the country and the Conservative Party needed unity.

Oil prices, because they are priced in dollars, are very sensitive these days to the movement in the dollar. After a slightly higher opening on Sunday night, prices plummeted in the middle of the night as the dollar reversed its weakness and turned higher. The oil market held some key support and ultimately the fundamentals for oil are very bullish as we get closer to winter.

If you don’t think the war in Ukraine is about energy and energy dominance, consider the fact that Russia attacked Ukraine’s energy sector in an attempt to shut off the lights which could be a precursor to what we see this winter. Bloomberg News reported that, “Ukraine’s critical energy infrastructure was extensively damaged on Saturday as Russian troops delivered another large-scale wave of missile strikes, leaving 1.5 million or more people temporarily without power.”

Now Reuters reports, “Western countries accused Russia on Monday of plotting to use a threat of a bomb laced with nuclear material as a pretext for escalation in Ukraine, as Moscow evacuated civilians from a southern city in anticipation of a major battle. With Ukrainian forces advancing into Russian-occupied Kherson province, Russia’s defense minister Sergei Shoigu phoned Western counterparts on Sunday to tell them Moscow suspected Kyiv of planning to use a so-called “dirty bomb”.

As it’s becoming more apparent that the European price cap is not going to work, China seems to be taking advantage of the hot export market. Reuters reports that, “China’s diesel exports in September surged to their highest in more than a year while aviation fuel shipments were the most in 29 months as refiners rushed to cash in on robust export margins, data showed on Monday.”

Reuters reports that “Schlumberger (SLB.N), the world’s largest oilfield services provider, is rebranding itself with a new name, color scheme, and logo that underscores its ambitions for a lower-carbon future, the company said on Monday. The nearly 100-year-old firm, originally named after its founding family, has become a giant in oilfield services and equipment such as drilling and subsurface analysis. But it has shed old-line products and recast itself as a digital services provider and supporter of cleaner energies.

Natural gas is getting very oversold after a price crash on strong production and mild weather. EBW Analytics says, “The natural gas collapse has been fueled by a wholesale market reevaluation of winter risk heading into the heating season. A record-breaking fall injection reached a fifth-straight triple-digit storage build, with injections averaging an eye-popping 114 Bcf/week. Crumbling weather-driven demand fell 35 Bcf last week—and now suggests the possibility of three November storage injections to approach 3.6 bcf. However, if the mid-November forecasts turn colder, a technically oversold market could spike with little forewarning.

Globally Javier Blas at Bloomberg tweeted that, “Unseasonably mild weather in Europe continue to push down gas and electricity prices — bringing quite a lot of economic relief. In late October, Berlin and Zurich may see 20 Celsius this week, and Paris and Madrid almost 25 Celsius. 

The economic turbulence is causing a lot of volatility but I don’t think it’s going to change the fact that we’re going to continue to be undersupplied as we head into winter. The bottom line is some favorable weather conditions in Europe and the United States have allowed us to build up some supply but we can’t count on Mother Nature bailing us out all winter. It’s clear that Russia is going to continue to be aggressive and that continues to raise the risk of a disruption of supply so I don’t think the market can take that too lightly. In the meantime just get ready for some more volatility but use weakness to lock in positions going into winter. That’s true of oil products as well as natural gas.

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