Rumors. The Energy Report 11/02/2022

War and rumors of war. Not only is Russia spreading its terrors throughout the world, the New York Times is reporting that Russian officials discussed the use of nuclear weapons in Ukraine. The Wall Street Journal reports, “Saudi Arabia has shared intelligence with the U.S. warning of an imminent attack from Iran on targets in the kingdom, putting the American military and others in the Middle East on an elevated alert level, said Saudi and U.S. officials. The Journal wrote, “In response to the warning, Saudi Arabia, the U.S., and several other neighboring states have raised the level of alert for their military forces, the officials said. They didn’t provide more details on Saudi intelligence. Saudi officials said Iran is poised to carry out attacks on both the kingdom and Erbil, Iraq, to distract attention from domestic protests that have roiled the country since September.”

Even North Korea wants to get into the act or at least they don’t want to be forgotten about. Fox News reported that, “North Korea on Wednesday fired at least 17 missiles in the direction of South Korea, and at least one landed near the rivals’ tense sea border. South Korea retaliated by firing its own test missiles. The launches came hours after North Korea threatened to use nuclear weapons to get the U.S. and South Korea to “pay the most horrible price in history” as it has intensified its fiery rhetoric targeting the ongoing South Korean-U.S. military drills that it views as an invasion rehearsal.”

To say the geopolitical risk factors for oil are all over the map is an understatement. With all these risk factors on the rise, it shows once again how unwise it was for the Biden administration to drain our reserve.

This is happening as the American Petroleum Institute (API) in their weekly report showed that petroleum inventories are still dangerously low. The API said that crude inventories dropped by 6.5 million barrels for the week ended Oct. 28, the API reported, compared with estimates for an increase of 267,000 barrels, and a build of 4.5 million barrels reported in the previous week. The API data also showed that gasoline inventories fell 2.6 million barrels last week, while distillate stocks increased by 865,000 barrels. So if the Energy Information Administration confirms, we will see inventories of all major petroleum products below average for this time of year.

The tightness of heating oil supplies are raising real concerns about shortages this winter. Reuters is reporting that, “The Biden administration will offer Americans nearly $4.5 billion in assistance to help lower home energy costs, the White House said on Wednesday. The package, announced by the Department of Health and Human Services through the Administration for Children and Families, will also help families make cost-effective home energy repairs and cover unpaid utility bills, the statement said. Separately, the Department of Energy announced a nearly $9 billion package for new home efficiency programs administered by tribes and states, the statement added, as reported by Reuters.

The FT reports that, “Russia’s oil exports are set to decline by as much as 1mn barrel a day this winter even as the country expands its “dark fleet” of tankers, according to the world’s biggest independent energy trader. Russell Hardy, chief executive of Vitol, said that while Russia had made progress in shielding itself from the effects of tougher sanctions affecting its seaborne crude that come into effect from December, exports are still likely to fall by 500,000 barrels a day to 1mn b/d this winter.

This comes as the Economic Times reports that Russia has become India’s top oil supplier, edging past the traditionally dominant suppliers Saudi Arabia and Iraq, according to the energy cargo tracker Vortexa. Russia supplied 946,000 barrels per day of crude to India in October, the highest ever in a month. It accounted for 22% of India’s total crude imports, ahead of Iraq’s 20.5% and Saudi Arabia’s 16%. Compared to September, overall crude import went up 5% in October and that from Russia rose 8%, according to Vortexa, an energy intelligence firm that has offices in Singapore and London and tracks oil and gas tankers across the globe, providing freight and inventories analytics.

The bottom line for oil  is it looks like we have broken out of the wedge to the upside, and we should see the market gain significantly in the coming weeks. There is a little hesitation to get too long ahead of the Federal Reserve today. Well, it appears that a 75-point basis point increase is in the cards. The concern is the Fed might become more hawkish in the statement or in Jerome Powell’s press conference. A the same time the Fed might suggest that they are going to ease up a little bit from the panic over inflation or maybe pivot away from some of their more hawkish rhetoric. While the Fed may move us up or down today and it could have the dollar make a big move, we still believe that the risks are to the upside. Regardless of what the Fed says, as we get into winter, it’s going to be about supply versus demand. If the supplies are not there, people will pay up for them.

Weather forecasts are wrecking havoc with natural gas. First it’s going to be too hot, then it’s going to be too cold. First, the Freeport LNG export terminal is supposed to reopen soon but there are reports that they have not filed the paperwork that they need to do so to get approved. EBW Analytics reported that Freeport LNG has yet to submit the required paperwork to regulators. While the situation is murky, at least modest delays appear likely.

Natural gas surged on reports of cold weather in late November and then broke back hard after those forecasts became a bit iffier. EBW says that a turn colder for weather forecasts may be lurking at the end of the 11-15 day window. Monday’s spike exemplifies latent upside risks for the 30-45 day outlook if a bullish forecast shift catches shorts off guard. Still, steep declines remain ultimately favored by mid-to-late winter-and potentially sooner if bullish catalysts fail to materialize.

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