About The Author

Phil Flynn

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

A global oil supply squeeze is brewing as China’s economy looks like it’s getting ready to soar. Overnight data showed the Chinese manufacturing sector saw its biggest surge in a decade and will soon erase any perception of short-term oversupply. China’s official manufacturing PMI hit 52.6 in February, and in their outlook, they are predicting even more growth in the coming months. The news initially caused oil to rally but now is pulling back as traders fear what the Energy Information Administration may say about crude supply and are even more fearful of the reaction by the Fed if China starts increasing commodity prices.

The oil supply picture short term is muddled after the American Petroleum Institute (API) showed another stunning 6.203 million barrel increase in crude supply as refinery maintenance is reducing US demand by millions of barrels a day. Yet they had better not stay in maintenance much longer as the US is exporting a record amount of petroleum products to the world as the US product supply is well below normal.  The API reported drops in oil products with gasoline down 1.774 million barrels and distillate inventories down 341,00 barrels.

In fact yesterday, the Energy Information Administration (EIA) said in their monthly report that the supply of crude and petroleum products in the United States fell in December to 19.49 million bpd, the lowest since March 2021. The US refineries will have to get to work and that should add 2 to 4 million barrels a day of demand in the coming weeks and months.

On top of that, if China’s manufacturing sector does not falter it will intensify the global shortfall of distillate inventories. That will add to diesel prices and inflation and does not even raise the issue of gasoline additive shortages that are looming because of the Russia-Ukraine war.

It is also unlikely that OPEC will be able to feed this demand as Russia starts its production cut as Nigeria helped OPEC raise output even as the cartel is still below its output targets. Reuters reported that an OPEC poll showed that OPEC production was up 150,000 barrels a day but is still underproducing by 880,000 barrels a day.

The EIA also had a big downward adjustment in their previously reported oil production number. The EIA reported that  US December crude production was at 12.101 mbpd vs 12.377 mbpd (revised from 12.375 mbpd) in November. That number is a concern as the Biden administration’s anti-oil policies and rising production costs are causing a pullback in US oil drillers. Rig counts are falling and costs are rising. Thank goodness at least the US is finally allowing Gulf of Mexico lease sales that were privately held up by the anti-oil Biden administration.

The U.S. Bureau of Ocean Energy Management (BOEM) will hold an oil and gas lease sale in the Gulf of Mexico in March 2023 it announced Friday. The lease sale is one of three offshore lease sales initially canceled by the Biden administration in May 2022. The Gulf of Mexico Oil and Gas Lease Sale 259 will offer approximately 13,600 blocks on 73.3 million acres in the Western, Central, and Eastern Planning Areas on the U.S. Outer Continental Shelf. The opening and reading of the bids will begin at 9 a.m. Central Daylight Time on March 29, 2023.

Of course, once you buy the lease you have to worry whether the Biden Administration will block your permission because they are the pettiest and most vindictive administration in the history of the country against oil and gas. Not only do they falsely accuse the industry of price gouging and manipulation, but their policies have also led to higher prices and more global price instability. The long-term damage from these policies will sadly be felt for years.

For oil, we must get through the EIA report. The market is sensing another crude build based on the API. Yet the focus should start to change soon as refineries will not stay down forever. You have to try to ignore the fact that the global product situation is dangerously below average even with one of the warmest winters on record in the US and Europe as far as heating degree days are concerned. Yet with China roaring back, you had better hope for a deep recession to avoid a major supply squeeze this summer.

Natural gas is trying to come back from one of its deep price dives. Freeport LNG’s progress as well as some concerns about some production cutbacks is fueling the rebound. The EIA reported that in December 2022, dry natural gas production increased year over year for the month for the 21st consecutive month. The preliminary level for dry natural gas production in December 2022 was 3,068 billion cubic feet (Bcf), or 99.0 billion cubic feet per day (Bcf/d). This level was 1.0% (1.0 Bcf/d) higher than December 2021 (98.0 Bcf/d) and the highest level for the month since 1973, when we began tracking dry natural gas production. Gross withdrawals also increased from December 2021: Gross withdrawals: 3,717 Bcf for the month, or a daily rate of 119.9 Bcf/d and A 1.0% increase compared with December 2021 (118.7 Bcf/d) The highest daily rate of gross withdrawals for the month since 1980, the earliest year in this data set. So a record.

Estimated natural gas consumption in December 2022 was 3,385 Bcf, or 109.2 Bcf/d. This level was 12.6% higher than in December 2021 (97.0 Bcf/d) and the highest for the month since we began using the current methodology for natural gas consumption in 2001. So a record.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network


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