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
Sleep Walking. The Energy Report 03/30/2023
There are more signs that the United States is sleep walking into an energy crisis and let’s hope the country wakes up before it is too late. Disturbing oil inventories that are showing signs of a major supply squeeze and a US foreign policy that is increasing geopolitical risk that increasingly emboldening our enemies are areas of concerns.
The latest outrage comes as Russia arrests a Wall Street Journal reporter. The reporter, Evan Gershkovich, was arrested in Yekaterinburg on suspicion of espionage. The Russians say they caught him red handed but the truth most likely is that Russia is going to use him as a political pawn. Who can forget that the Biden administration traded convicted Russian arms dealer Viktor Bout, to secure the release of a American held by Russia, Brittney Griner. Biden was unable to secure the release of Paul Nicholas Whelan the former United States Marine arrested in Russia on December 28, 2018, and accused of spying.
This comes as Russia is forming energy pacts with China and working more closely with Saudi Arabia.
US petroleum supplies took a big hit yesterday as refiners started to raise output. After Tuesday’s big surge in prices, the crack spread traders adjusted their trades to focus on gasoline supplies that are too tight.
Ongoing dispute over oil supply between Kurdistan and Iraq is causing some oil companies in the Kurdistan region to shut down production after Turkey halted Iraq’s northern oil exports in response to an international arbitration ruling. Now, while a lot of that oil is going into storage, if this gets resolved soon it will put downward pressure on the market.
This becomes a backdrop of what is going to be a new season of big petroleum supply draws in the coming weeks. Yesterday the Energy Information Administration (EIA) reported a massive 7.5 million barrels crude drop from the previous week. More than likely based on trends we’re going continue to see major crude oil supply drops in the coming weeks.
Part of the reason for that is refiners are coming out of maintenance and the fact that demand for fossil fuels around the globe is surging. The EIA reported refineries operated at 90.3% of their operable capacity last week. They are responding to surging gasoline crack spreads and raised gasoline production to 10.0 million barrels per day. Total petroleum demand increased to a healthy 20,476 barrels a day and despite the refiners’ best efforts, product supply did not increase. The EIA reported that total motor gasoline inventories decreased by 2.9 million barrels from last week and are about 4% below the five year average for this time of year. Distillate fuel inventories increased by 0.3 million barrels last week and are still 9% below the five year average for this time of year.
Refiners can’t focus as much on the diesel shortfall as the market is screaming for more gasoline supply. Yet there are signs that diesel is going to remain tight because of tightness of heavy crude.
Irina Slav at Oil Price wrote that heavy crude oil traditionally trades at a significant discount to lighter and sweeter grades, but the price of heavy crude is climbing. The main factor driving the uptick in heavy crude prices is a new mega-refinery in China which has contracted at least 8 million barrels of heavy crude. As well as China’s mega-refinery, constrained supply from Venezuela and Ecuador and the end of refinery maintenance season in the U.S., are pushing prices higher.
The DEMOCRAT-GAZETTE reported that, “Oil companies offered a combined $264 million Wednesday for drilling leases in public waters off the Gulf of Mexico in a sale mandated by last year’s U.S. climate bill compromise. The auction was the first in the Gulf in more than a year and drew interest from industry giants including Exxon Mobil, Shell and Chevron. Development of the auctioned leases is estimated to produce more than 1 billion barrels of oil and more than 4 trillion cubic feet of natural gas over 50 years, according to a federal analysis. But burning the oil is forecast to increase planet-warming carbon dioxide emissions by tens of millions of tons, the analysis found, drawing renewed ire from environmentalists. On the same day of the auction, the Biden administration announced plans to expand offshore wind resources powering millions of homes.
The Department of Interior’s oil and gas lease auction comes two days before a deadline set last year by climate legislation within the Inflation Reduction Act, which Biden signed into law after clinching support from West Virginia Democratic Sen. Joe Manchin, a fossil fuels industry supporter. To help get Manchin’s approval, the act prohibited leasing public lands for renewable power unless tens of millions of acres are first offered for fossil fuels. The climate law also raised the royalty rate companies must pay on oil they produce. The Biden administration set the rate for Wednesday’s sale at the maximum allowed — 18.75%, versus 12.5% historically — yet that did not appear to curb interest. The parcels auctioned Wednesday cover 114,000 square miles; an area larger than Arizona. Like past auctions of similar magnitude, only a fraction of the available acreage — about 2,600 square miles — received bids.
Bloomberg News reports, “After years of wrangling, the world’s most important oil price is about to be transformed for good, allowing crude supplies from west Texas to help determine the price of millions of barrels a day of petroleum transactions. The shift is because the existing benchmark, Dated Brent, is slowly running out of tradable oil for it to remain reliable. As such, its publisher S&P Global Commodity Insights — better known by traders as Platts — has been forced to make a dramatic overhaul. Its switchover was fraught with controversy and caused a lot of stress among physical oil traders. But it was necessary. BP Plc at one stage said that Dated Brent was subject to “increasingly regular dislocations. ”But the future of Dated is now set. From cargoes for June onward, West Texas Intermediate Midland, oil from the Permian will become one of a handful of grades that set the Dated benchmark.” Must read.
Smart hedgers are putting on positions right now. With the global economy seemingly stabilizing and signs that Chinese demand is going through the roof, there is significant upside risk in the price of oil and products from this point going forward. The seasonality for oil is also very bullish. Moore Research points out that the price of September crude between March 29th and April 14th has gone up 14 out of the last 15 years for an average profit of $3175.
Natural gas weakness is apparent. With the exports hampered by the shutdown of the Freeport LNG export terminal caused supply to back up. Supply had increased in anticipation of more LNG Exports. The EIA reported that U.S. natural gas production grew by 4% (4.9 billion cubic feet per day [Bcf/d]) in 2022, averaging 119 Bcf/d. Three regions—Appalachia, Permian, and Haynesville—accounted for 60% of all U.S. production in 2022, similar to the proportion in 2021. The most comprehensive measure of U.S. natural gas production that we collect is gross natural gas withdrawals.
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