Russia Won’t Give It Away. The Energy Report 01/10/2023

Yesterday it was all about China reopening. Could the shift today switch to Russia.? Oil prices are hanging in from the Sunday night breakout as it is still trying to assess the Chinese reopening while waiting for Fed Chair Jerome Powell’s speech in Sweden. The market should move on to his comments to see if the Fed is leaning toward a 25-basis increase in February as opposed to half on the recent sign that inflation has moderated. There has been more talk of a short-term oversupply as warmer than normal temperatures, the Saudi oil price cut and talk of Russian oil being sold with bigger than expected discounts. Yet even though the Russians need money, there are signs that they are getting ready to say nyet to further Russian oil discounts.

This morning the Russian oil ministry said it is monitoring its discount on oil and will seek to limit discounts any further. This comes after Russia’s Deputy Prime Minister Alexander Novak said that Russia might cut production by 500,000-700,000 bpd in response to Europe’s partial oil embargo on Russian oil imports.

The G7 is poking the Russian bear. They say that the G7 coalition wants two price caps for Russian oil products from February. One price cap would apply to oil products that trade at a discount, and the other would apply to items that trade at a premium. The G7 seems to be getting a little confident that their price cap scheme is working. The reality is that the price cap has not been tested. A rising dollar and warm temperatures have capped prices more than the G7 has. Russian seaborne exports have fallen from 3 million barrels a day from to 2.5  million barrels a day from a year ago. Russia may still hold the cards. As China reopens, the G7 may learn very quickly why price caps do not work. A Russian cut may be coming so stay tuned.

Tass Reported that, “Russia will soon publish information on the application of the presidential decree on the response to the price cap for Russian oil, the country’s Energy Ministry said on Tuesday. “Detailed information about its application will be published soon, as well as the specifics regarding the procedure for monitoring prices and discounts,” the statement said. At the same time, the Ministry of Energy may adopt additional measures to restrict possible discounts on Russian oil to the limits based on market prices and will monitor oil prices and discounts. “The monitoring results will be used to prepare, if necessary, additional measures aimed at limiting the possible discount to the limits based on market prices,” the ministry said. “We stress that the current illegal meddling of Western countries in market mechanisms threatens the world’s safe and stable energy supply and that correcting the situation will necessitate considerable cooperative efforts on the part of responsible countries,” the Ministry of Energy added.”

In the meantime, it appears that China is buying every barrel it can get its hand on. The World Health Organization said that China surging covid cases will not significantly affect Europe so that is bullish.   Reports say China is issuing a lot of import licenses and that is another sign. China New Year travel in China is surging. Yesterday I had the wrong animal for the New year as this common Chinese Lunar New Year is the year of the rabbit.

Another bullish factor for oil is a growing shortage of coal. Reuters is reporting that India is warning that because of increased demand for power supplied from coal has not kept up with supply, shortages are looming.

Oil traders will also look to today’s American Petroleum Institute (API) report for direction. I expect slight flaws across the board but data could still be impacted by refinery shut-downs. What we do know is that the Biden administration is trying to slowly squeeze out the last remaining barrels of the 180-million-barrel SPR release. Instead of getting it all over with, the SPR released 780.000 barrels.

RBOB supply will be watched after RBOB futures soared on better-than-expected demand, refinery outages, and the Chines reopening. Distillates also will be watched but warm weather is taking the pressure off of the market which is still much below-average levels for this time of year.

The Fed should thank Mother Nature for fighting inflation. Natural gas prices did bounce after getting crushed. How low did prices for natural gas get? John Kemp at Reuters reports that, “U.S. GAS front-month futures prices have slumped to less than $3.80 per million British thermal units (34th percentile for all months since 1990) from more than $9.10 (86th percentile) at the end of August. Figures have been adjusted for inflation using the core consumer price index for all items excluding food and energy.

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