Cuts Are Coming. The Energy Report 04/11/2023

OPEC Plus Russia is becoming Biden’s worse nightmare! Ok, maybe his worst nightmare along with security leaks, cities where crime rates have gone through the roof, but you get my drift. As we see demand start to rise, we are seeing OPEC cut back and that means oil prices should have found its floor.

The latest evidence that OPEC is serious about cutting production comes from Energy Intelligence. The group reported that crude oil output in March by OPEC-plus members taking part in the production agreement saw its steepest fall in 10 months, or 680,000 b/d, to 37.64 million b/d, according to Energy Intelligence’s assessment. The bulk of the decline came from Russia and Nigeria, which together accounted for 440,000 b/d, or almost two-thirds, of the monthly reduction. The March production was 2.5 million b/d short of OPEC’s target for the month, the largest shortfall since October.

There are some who are saying that OPEC is cutting production because they are seeing signs that demand is not so strong. Yet the evidence seems to be flying in the face of that argument. Reuters reported yesterday that India’s fuel consumption jumped to a record high in March, data showed on Monday. Consumption of fuel, a proxy for oil demand, rose by 5% from a year earlier to 4.83 million barrels per day (20.5 million tonnes), the highest recorded data going back to 1998 from the Indian Oil Ministry’s Petroleum Planning and Analysis Cell.

Also, reports that China’s demand growth has been somewhat disappointing seems to be ignoring the fact that China imported a record amount of crude oil. China National Petroleum Corporation’s Economics and Technology Research Institute (ETRI) said in its annual industry outlook released at the end of last month that China’s crude oil imports will average 10.8 million barrels per day (bpd) in 2023, matching the previous record high from 2020.

So, I am not buying the argument that OPEC cut production because they saw that demand was weak. I think OPEC and Russia cut production in response to the fact that the Biden administration decided to manipulate the price of oil with Strategic Petroleum Reserve releases. I think OPEC is responding to the fact that Europe put a price cap on oil. I believe the OPEC cut its payback.

The US inventory report this week will get a little help from the Strategic Petroleum Reserve as we saw another 1.6 million barrels of oil released last week. The amount was from previously agreed to government mandated release and is a far cry from the massive releases we saw earlier in the year and that puts the Strategic Petroleum Reserve at 369.6 million barrels. The 1.6 million barrels released last week surprisingly was sweet oil.

As we have pointed out before, one of the reasons why oil prices stayed somewhat reasonable this year was because of an incredibly warm winter in Europe and the United States. The Energy Information Administration (EIA) acknowledged that mild temperatures reduced U.S. household heating fuel consumption last winter and the EIA said, “Since October, our estimates of heating oil consumption fell by 9% and prices by 2%. They estimated that the average U.S. household that uses heating oil as its primary space heating fuel, consumed 470 gallons of heating oil this winter, down 9% from the October estimate of 519 gallons. Warmer-than-normal winter temperatures reduced consumption, particularly in the Northeast. Overall, 4% of U.S. households use heating oil as the primary space heating fuel, mostly located in the Northeast.

In March they estimated that consumer prices averaged $4.45 per gallon, slightly ($0.09) lower than we forecast in October. We expect U.S. household expenditures for heating oil to average $2,094 for the 2022–23 winter heating season, down more than 11% from the initial October estimate of $2,354. Although heating oil costs are lower than we had previously expected, the cost was 13% higher compared with the 2021–22 winter heating season.

The EIA sat that at the beginning of the winter they expected Russia’s full-scale invasion of Ukraine and subsequent sanctions would limit Europe’s supply of heating oil, and record-high natural gas prices would lead to fuel switching from natural gas to distillate fuel (which includes heating oil and diesel fuel), contributing to higher heating oil prices. Warmer-than-normal winter temperatures in Europe reduced distillate demand below our initial estimates, and imports into Europe from the Middle East and Asia helped offset the loss of imported distillate from Russia and increased inventories.

Merger mania as well as an ambitious plan for carbon capture seems to suggest that the long-term outlook for fossil fuel demand continues to be very strong. Pioneer Natural Resources Co’s (PXD.N) shares rose as much as 8.5% on Monday following a report that Exxon Mobil Corp (XOM.N) held preliminary talks with the U.S. shale oil producer about a possible acquisition according to Reuters. This is Exxon’s big move to build dominance in the Permian Basin. It also is a bet that shale oil and gas will be a profitable play. The Wall Street Journal said, “Exxon, which has been on the prowl in the Permian Basin for months, has also discussed a potential deal with Occidental and at least one other company, the Journal reported. Such a transaction would send the strongest signal yet that drillers in the Permian, the hottest U.S. oil field, are set to bulk up through acquisitions. Oil companies boast healthy balance sheets that give them the stomach and means to shop for targets.

Mitch Shedlock at Mish Talk writes that, “Occidental Petroleum is making a billion-dollar bet on using tennis court sized fans to suck carbon dioxide from the air. He writes that when they start running in 2024, the fans will suck massive amounts of carbon dioxide out of the air. The carbon will be funneled thousands of feet down deep wells into geological formations, where it should remain for centuries. Removing CO2 from the atmosphere at this scale has never been done before, and the enterprise comes with abundant commercial and scientific uncertainties. The plant’s fans will pull up to 500,000 metric tons of carbon dioxide from the air a year—about as much as 111,000 American cars spew out in a year, according to the Environmental Protection Agency. The Houston-based company said it wants to build up to 135 such plants by 2035, depending on public incentives and demand for carbon credits. Fans pull air into containers, where chemicals bind with the CO2 to separate it from the air, eventually creating pellets. The pellets are heated to release pure carbon dioxide, which is compressed to be transported through pipelines and funneled deep underground.

Airbus has repurchased credits from Occidental covering 100,000 metric tons of carbon removal a year over four years, according to the companies. Mish points out that the taxpayer are also footing the bill. “The Occidental plan is possible thanks to subsidies that will cover 45 percent of the cost. He says that there are 278 million cars in the US and 1.4 billion in the world. When fully operational, Occidental’s fans will only reduce the energy of 111,000 cars.

Occidental hopes to make money by selling carbon tax credits to other companies that use unclean energy. Powering the fans requires energy. Occidental is investigating the use of mini-nuclear reactors and using energy from natural-gas powered plants that capture their own CO2. The Inflation Reduction Act signed into law by Biden last year, rewards companies that capture and store atmospheric CO2 with a $180 tax-credit.

Natural gas is desperately seeking a bottom. It looks a bit better but be cautious. While the weather forecast for late April seems to be below normal, in Europe temperatures are above normal. Just remember that just because it’s cheap it can still get cheaper. Still it’s tempting at these levels to start to build positions, especially in the back months.

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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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