The Worst Energy Crisis. The Energy Report 10/26/2022

t is kind of a sad day when Saudi Arabia is the country speaking the truth about the global energy crisis when we here at home continue to disparage the US oil and gas industry and live in a green fantasy world that has put our economy and people’s lives at risk.

The Saudi Energy minister called out Joe Biden for his reckless use of the Strategic Petroleum Reserve (SPR), to try to manipulate the price of oil with those reserves. “People are depleting their emergency stock and using it as a mechanism to manipulate the market when its purpose was to mitigate shortages of supply” and warned that, “Losing emergency stocks may be painful in the months to come. Nations shouldn’t use emergency oil reserves to manipulate prices.” The Saudi energy minister correctly criticized the Biden administration for the reserve release that was done purely for political purposes. By prematurely releasing oil from the Strategic Petroleum Reserve, the Biden administration artificially lowered prices, discouraged investment, and left our strategic reserve at historically low levels. It is very clear that the strategic petroleum reserve is not large enough to manipulate prices over the long run and will only cause the market to dislocation in the future that will have long-lasting consequences in the market and creates the environment for price squeezes this winter. The reserve has been drawn down at a pace never seen and is raising concerns by some of those in the SPR program about the viability of the reserve if they continue to draw down reserves at a record pace.

Now as we face winter in the United States and supplies of petroleum are below normal and they’re even talking about diesel rationing, the wisdom of this politically motivated SPR release sadly may become very apparent. Saudi Aramco CEO Amin Nasser this morning hit on some of the same themes warning that there were many uncertainties in the oil market ahead of planned European embargoes on Russian crude and products. But he hit the main point that, “The investment in oil is still not sufficient enough to address global demand.”

Because of the green energy movement and the Environmental, social, and governance (ESG), the Paris Climate accord, and the green energy lobby led by global elites that have discouraged investment in fossil fuels, shut refineries and left us vulnerable. It is already hitting home as Bloomberg News points out that, “Diesel inventories nationwide are at lowest seasonal level ever heading into winter, and some areas in the Northeast have already started rationing fuel. The shortage is almost certain to drive up prices for the heating and trucking fuel, further straining household budgets.”

Concerns about tight supplies will draw a lot of focus to today’s Energy Information Administration report. Last night the American Petroleum Institute (API) version of the report showed that crude supplies did increase by 4.520 million barrels. Of course the market knows that the only reason that we saw that size of build was the 3.3-million-barrel release from the Strategic Petroleum Reserve. The API showed that distillate supplies last week increased only 35,000 barrels. This is a major concern because it’s becoming apparent that if we have a cold winter in this hemisphere, people who use heating oil might run out of supply. Bloomberg News reports that, “The diesel shortage that had the White House on edge last week is spreading from the Northeast to the Southeast, prompting at least one supplier to initiate emergency protocols. “Because conditions are rapidly devolving” fuel supplier Mansfield Energy is now requiring a 72-hour notice for deliveries to secure fuel and freight, according to a note to customers. In areas that are tightest, fuel prices are running 30-80 cents higher than the market average, Mansfield said, adding that Tennessee is “seeing particularly acute challenges.”

Of course, the Biden administration tells you that the Strategic Petroleum Reserve releases were all about lowering gas prices. Well yesterday the RBOB future seemed to suggest that it is not working. RBOB gasoline prices surged and when we got the report from the API, it showed that the supply of gasoline fell last week by 2.278 million barrels.

Tightness in global refining capacity and the shortage of diesel may cause refiners to be torn between ramping up production of diesel or gasoline. As we get closer to winter, diesel may win out but that means that we could see some more volatility in the prices of gasoline open. Reuters reported that Valero Chief Executive Joe Gorder said on Tuesday that U.S. Energy Secretary Jennifer Granholm was told at a recent White House meeting with energy executives that refineries shuttered in the last few years won’t return production. “The one interesting thing that came out of it, too, was there was consideration for the ability to restart refining capacity that had been shut down,” Gorder said. “And I think a general sentiment was that wasn’t going to happen. He also said Valero Energy Corp <VLO.N> said on Tuesday it expects high demand amid tight supply for motor fuels and plans to operate its 14 refineries up to 95% of combined total production capacity of 3.2 million barrels per day (bpd) in the fourth quarter. The second largest U.S. crude oil refiner said it plans to operate its seven U.S. Gulf Coast refineries up to 95%, or 1.78 million bpd, of their combined total throughput in the fourth quarter.

Prices overnight are also getting a boost from the weaker dollar. The British pound is soaring, Japan is continuing to intervene in their currency and it appears that despite the fact that the Federal Reserve is still going to be aggressive on interest rates, other central banks are trying to slow the dollars meteoric rise. The dollar looks fairly toppy which should be supportive for all commodities across the board. One exception may be copper that has been weak due to concerns about the Chinese economy.

Natural gas prices exploded the last couple of days from extremely oversold areas. While the bounce was impressive, we do have some resistance long term. We are still very bullish on natural gas and think as soon as the cold weather comes in, we will find that final bottom. November could be a very bullish month for natural gas. LNG export terminals come out of maintenance and we should see the restart of the Freeport terminal and perhaps some winter weather.

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