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
Joe Biden seemed to show distain for President Trump’s “America First” Agenda. Biden was also very jealous with the high regard that President Trump was held in in Saudi Arabia and Israel and other countries around the Middle East. He earned respect by engineering the historic peace achievement with the Arab accords that had former Israeli enemies recognizing Israel and OPEC responded to Trump’s tweets for more oil production. The Mid-East also allowed President Trump to end the production war between Russian and Saudi Arabia that helped save the US oil and gas industry. President Trump also wanted to refill the SPR after the covid price crash at about $24.00 a barrel but was thwarted by democrats that called it a bailout for the US oil and gas industry. That vindictive decision cost American taxpayers many millions of dollars.
So, Biden chose to reverse those energy policies led by trying to shun long time US ally Saudi Arabia, vowing to make them a “pariah state”. Yet that short-sighted policy is now backfiring on the administration that put America last and now is causing Saudi Arabia to ignore the needs of the US and instead put Saudi Arabia first. That means that Saudi Arabia will become closer with our adversary and will not adhere to US requests for more oil production unless it is in Saudi Arabia’s best interest. In fact I would argue that the recent OPEC production cut would not have happened if the Biden administration had a more professional relationship with the country.
OPEC’s latest one million barrel a day production cut shows how Biden has lost control of the global oil market but more importantly, how his policies have pushed Saudi Arabia closer to the interests of China and Iran and away from US interests. Bidens’s policies have made America a more expensive and dangerous place. The Wall Street Journal reported today that, “An oil production cut by Saudi Arabia and its allies demonstrated how Crown Prince Mohammed bin Salman is willing to set aside U.S. concerns to pursue a nationalist energy policy aimed at funding an expensive makeover of his kingdom. The Journal pointed out that, “’the second time in less than six months that the Saudis have disregarded U.S. concerns—despite significant potential ramifications on the bilateral relationship—that elevated oil prices would help fuel Russia’s war machine. Sunday’s production cut is the clearest signal yet that the Saudis will do whatever it takes to keep oil prices at levels that benefit them. Prince Mohammed is implementing what analysts label a “Saudi First” economic policy aimed at giving priority to national interests at a time of growing uncertainty about the U.S. commitment to defend its Middle Eastern allies amid increased great-power competition in the region.”
It was also reported that the Saudis again felt betrayed by the Biden administration when US energy Secretary Jennifer Granholm seemed to reverse a promise that the US would start to refill the Strategic Petroleum Reserve at below $70.00 a barrel. The announcement about the SPR when Granholm suggested the replenishment would not happen, was it might take years for that to happen and the market plummeted. So again, the Saudis saw that they could not trust this administration, so they better go it alone and find allies in China and repair relations with Iran just to hedge their bets.
No one believes that Saudi Arabia should have gotten off from some type of punishment for the murder of Jamal Khashoggi, the Saudi dissident journalist that was assassinated by agents of the Saudi government at the Saudi consulate in Istanbul. But for the larger interests of the United States, it should have been handled in a much more professional manor. Instead, Biden dismissed Crown Prince Bin Salman and refused to talk with the real leader of the country until it became apparent that Saudi Arabia was an important strategic and economic partner. Biden foolishly tried to send Saudi Arabia a message by tapping oil from the Strategic Petroleum Reserve because he was unhappy that Saudi Arabia did not adhere to his wishes on oil production. This then started a long term production war with OPEC that the United States is going to lose. The US has now drained its reserve and is having a very difficult time buying that oil back. It’s likely that Biden’s manipulation of the market has caused some long-term structural damage that will end up costing taxpayers more money in higher energy bills.
That circles us back to this weekend’s surprise production cut. Even the International Energy Agency, that normally underestimates demand, was warning that even prior to this move by OPEC the world was going to be under supplied with oil. This is going to leave a huge supply deficit in the back half of the year and is going to cause much higher prices for consumers. And while we call this a surprise production cut, the reality is that the Biden administration has encouraged this type of behavior from the OPEC cartel. Biden’s immature foreign policy, for example vowing to make Saudi Arabia a pariah state or by accusing US energy companies falsely of war profiteering and price gouging is a type of leadership that that has caused a lot of the problems that we see with the US economy. Biden and his energy policies is focused on ESG investment and is making a structural shortage of oil and gas worse.
Of course, Joe Biden takes no responsibility and blames the oil companies, the man on the moon and the war in Ukraine. Reuters reports that, “The United States and European Union will confront any attempts to destabilize global energy markets, the two sides said on Tuesday after a meeting of officials in Brussels where they discussed the fallout in energy markets of Russia’s invasion of Ukraine.” The two sides reiterated their strong commitment to directly confront, with adequate measures, all efforts to further destabilize the global energy situation and to circumvent sanctions,” they said in a joint statement.
Now one story, if it were not for the OPEC cut, would have been bearish for prices. Reuters is reporting that, “Iraq’s federal government and the Kurdistan Regional Government (KRG) have reached a final deal to restart northern oil exports to be announced Tuesday, official sources told Reuters. A formal request has been sent to Turkey to restart oil exports through an Iraq-Turkey pipeline and “in the next few hours pumping will resume,” a Baghdad government official said. Turkey stopped pumping about 450,000 b/d of Iraqi crude through a pipeline from the Fish-Khabur border area to its Ceyhan port on March 25 after Iraq won an arbitration case.
Reuters is also reporting that “Baghdad has reached an agreement to hold a 30% stake in Total Energies long-delayed $27 billion Iraq project, two sources told Reuters on Tuesday. “The deal should be activated within days,” a senior Iraqi oil ministry official said.”
Heating oil and gasoline crack spread suffered a little bit with the reality that refiners would have to pay a lot more for crude oil to make oil and gas products yet in the long term, that is bullish for both gasoline and diesel fuel. Refiners will be tempted to make less supply if the margins falter. The good news is it’s that crack spreads are still historically high.
While gasoline prices are seven cents higher than they were a week ago, at least overnight they seemed to be stable according to AAA. Yet make no mistake about it, the move by OPEC will start to add to gasoline prices in the coming days and weeks. Hopefully, hedgers took advantage of the bank related sell off to put on hedges. They are going to be coming in handy here once the summer driving season kicks in the high gear.
Natural gas on the other hand cannot get a break. Once again, these markets are trying to find the bottom in the low $2 area but it’s difficult do. The one advantage of having high oil prices is that you should see more associated gas coming out of the wells. Of course the warm winter and the Freeport LNG disaster may cause us big problems in natural gas a year or two down the road.
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