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
Break in Case of Emergency. The Energy Report 03/09/2023
U.S. Energy Secretary Jennifer Granholm seemed to have an incredible idea. She said that any further releases from the U.S. Strategic Petroleum Reserve would be due to oil supply disruptions. Granholm said, “There has to be a situation like that that would generate interest in doing it. It’s not just about increases in prices, it really is about an emergency disruption.” While I applaud the Energy Secretary for her comments, perhaps she should have a talk with her boss. The reality is the Biden administration has used the Strategic Petroleum Reserve for political purposes more than any other president. While the administration says that the releases from the reserve were justified because of the war in Ukraine, the reality is this administration was releasing oil long before the war began.
The Biden administration had to cool prices as it was clear that their policies of drilling moratoriums and ESG and pipeline cancelations caused a contraction in oil and gas investment and they were getting the blame for the increase in prices. Then releasing oil from the reserve only further discouraged investment and damaged the market.
The Fed for their part has helped keep oil in its recent trading range even as the market is suggesting that demand will exceed supply in the coming months despite the Feds warning that higher interest rates are coming. It seems that when oil gets above $80.00 a barrel, Fed Chair Jerome Powell sounds more hawkish and when it’s in the low $70’s he sounds more dovish. Powell did address the fact that the Fed can’t keep oil prices down forever but pointed out that the US is also an oil producer so if oil prices go up, as they are most likely to do, it will not be all bad for the US economy.
The Fed’s Beige Book said that while inflation pressures remained widespread, businesses reported a moderation in price increases that they expect to continue this year. So, if we see reduced inflation expectations, is it possible that the Fed Chair’s bark will be worse than its bite? The odds of a 50 basis point increase for the march have gone up over 75%.
The funny thing is that oil is selling off because demand is too strong. Yes, strong job data, even with wages not keeping pace, means that energy demand is strong. As Bloomberg pointed out, oil demand in the US exceeded the 20 million barrel a day level last year which was almost completely back from the US covid lockdowns. Annual average consumption reached 20.28 million barrels a day compared to 20.54 million barrels a day in 2019 before covid-19. The EIA said that in shoulder season last week we averaged 19.7 million barrels a day. And despite some seasonal demand weakness in yesterday’s Energy Information Administration (EIA) supply report, there are signs that demand is getting ready to take off, not only here in the US, but also in China.
Let’s touch on China’s demand. Despite some China demand skepticism, we are seeing more evidence that Chinese demand is going to come back strong. Not only are we seeing Saudi Arabia raise their selling price to China, but we are also seeing a drop in China’s oil product exports, a clear sign that domestic demand is rising. The EIA reported a 100,000-barrel drop in US oil production this week and while a weekly drop is not a big deal, the drop does not fit with the EIA narrative that US oil would increase by 590,000 barrels per day, to 12.49 million barrels per day (bpd) in 2023, and by another 160,000 barrels to 12.65 million bpd next year. US production fell to 12.20 million barrels a day and some wonder if this could be a trend because of falling rig counts and challenges in the shale patch that have been made worse by the Biden administration.
The Wall Street Journal raised concerns about shale oil in a piece that previously was considered by some to be a fringe piece. The Journal wrote that, “The boom in oil production that over the last decade made the U.S. the world’s largest producer is waning, suggesting the era of shale growth is nearing its peak. Frackers are hitting fewer big gushers in the Permian Basin, America’s busiest oil patch, the latest sign they have drained their catalog of good wells. Shale companies’ biggest and best wells are producing less oil, according to data reviewed by The Wall Street Journal. The Journal reported last year companies would exhaust their best U.S. inventory in a handful of years if they resumed the breakneck drilling pace of pre-pandemic times. Now, recent results out of the Permian spread across West Texas and New Mexico, are mimicking the onset of a production plateau that has taken place at other, more mature U.S. shale plays.
At a major industry conference here this week, executives cited the stagnation in shale, saying it signaled a return to more dependence on foreign energy sources and more challenging times ahead for major U.S. companies after most of them posted record earnings last year. “The world is going back to a world that we had in the ’70s and the ’80s,” said ConocoPhillips Chief Executive Ryan Lance, during a panel at the conference called CERAWeek by S&P Global. He warned that OPEC would soon supply more of the world’s oil according to the Wall Street Journal.
Now I always warn about peak oil stories because time and time again when prices go high enough, we always find a way. That is how the shale revolution started in the first place. I think the real problem is the Biden administration and the ESG movement and the demonization of oil companies by this administration that is stifling investment and innovation. Biden’s historic and unprecedented war against US oil and gas has hurt our long-term energy security. Americans will be feeling the impact of these short-sighted policies for decades to come.
Overall, the weekly data was supportive. The EIA said, “U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.7 million barrels from the previous week. At 478.5 million barrels, U.S. crude oil inventories are about 7% above the five-year average for this time of year. Including the SPR draws, we are well below average. Total motor gasoline inventories decreased by 1.1 million barrels from last week and are about 3% below the five-year average for this time of year. Distillate fuel inventories increased by 0.1 million barrels last week and are about 7% below the five-year average for this time of year.
Winter blasts may not be enough to save natural gas but progress on Freeport LNG should provide a floor. Freeport LNG Development, L.P. (Freeport LNG) yesterday announced that it has received regulatory approvals from the Federal Energy Regulatory Commission (FERC) and the Pipeline and Hazardous Materials Safety Administration (PHMSA) to restart Train 1, the final train of Freeport LNG’s three train liquefaction facility to receive restart authorization. Freeport LNG’s Trains 2 & 3 returned to full commercial operation in recent weeks, reaching production levels in excess of 1.5 billion cubic feet per day. As the recommissioning of Freeport’s liquefaction facility continues and trains are restarted, changes in feed gas flows and production rates are to be anticipated, given the duration of the plant’s outage. As previously stated, a conservative ramp-up profile to establish full three-train production is anticipated to occur over the next few weeks.
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