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
The Battle Over the Strategic Petroleum Reserve. The Energy Report 05/10/2023
Biden’s misuse of the Strategic Petroleum Reserve and his foreign policy decisions could lead to a fossil fuel fiasco. Oil prices, looking for any excuse to move higher and focus on tight supplies and strong demand, found it in a report that the US was going to start refilling the US Strategic Petroleum Reserve (SPR) after completed maintenance work later this year. This is the latest in mixed messages coming out of the Biden administration regarding the reserve that they drained and now refilling that SPR has become a political and logistical nightmare.
The announcement on a plan to refill the reserve comes suspiciously right after White House National Security Advisor Jake Sullivan met with Saudi Crown Prince Bin-Salman in what was a mission to repair relations with the Biden administration for their amateurish foreign policy with the kingdom that the administration vowed would make it a pariah state.
Many traders and oil industry insiders believe that the move by Saudi Aribia to announce a surprise cut in oil production was because the Biden team seemed to back off a promise to refill the reserve when oil prices went below $70 a barrel. At that time Energy Secretary Jennifer Granholm reportedly angered the Saudi’s when she said that that refilling the SPR at $70 per barrel in 2023 would be difficult. She said that the United States couldn’t repurchase crude oil for the SPR and sell crude oil out of the SPR at the same time. This is from the administration that always brags about being able to walk and chew gum at the same time. In fact, walking and chewing gum may be the only thing they have succeeded in doing right.
At the same time the administration put out a report that seems to bristle at industry insiders and Republican claims that suggest that Biden’s unprecedented drawdowns from the SPR is damaging the salt domes leaving the SPR less effective as an emergency tool for real emergencies. Not emergencies like falling poll numbers over raising gasoline prices or emergencies like record oil exports to China or India but a war or other natural disasters and disruption that could shut down the US economy.
Yet as reported by Reuters a report by the widely respected Sandia National Laboratories, which monitors the health of the salt caverns, said the use of fresh and brackish water to push the oil out and maintain the integrity of the caverns did not damage the site and may have lengthened their lifespan. Anna Lord, geosciences engineer at the Sandia National Laboratories said, “Some of the cavern shapes have improved from the large influx of raw water, which may allow for an extension in cavern lifetime.” “There have been no major impacts to the caverns,” wrote Lord in response to Reuters questions on the state of the caverns. The raw water can smooth the internal features by removing older, rough walls, she added. Smoother walls will improve the Louisiana and Texas caverns’ long-term stability, potentially allowing more oil drawdowns, she added. The majority of the SPR sites were designed to sustain up to at least five drawdowns, she said according to Reuters.
According to my experts I have spoken with they generally agree with what she is saying on the surface. She may be correct yet they still believe that the report does not take into account the increased risk of domes collapsing or other issues with pumps etc. from technology from the 1970’s. There are some that say the Sandi reports are overly optimistic. We may or may not find out depending on whether the Biden team gets a real plan to refill the reserve. The plan, like their overall energy policy, is incoherent.
Oil did have a strong close regardless and finished back above key 10-day resistance levels for the first time since the Biden era regional bank failures started with the failure of Silicon Valley Bank. Yet a larger than expected increase in crude supply reported by the American Petroleum Institute (API), no progress in the debt ceiling talk and impending inflation data is causing a bit of a cautious retracement for oil this morning.
Yet there are many reasons to believe that the API 3.618-million-barrel crude supply increase was overstated. The API last week overstated a crude draw reporting a massive supply drop of 3.939 million barrels. Yet the EIA reported a much smaller draw of 1.3 million barrels. It is possible that the API build is getting more in line with the EIA data. Also keep in mind that the crude inventories include a 2.9-million-barrel release from the SPR. Now if you look at the Cushing, Oklahoma delivery point to try to filter out some noise, you see that API reported that crude supplies fell by 1.316 million barrels.
On the product side, the API reported that distillate supply plunged by a whopping 3-945 million barrels. That drop coincided with incredible planting progress by American farmers. The US ag crop may be the reason the world avoids food shortages this year as global grain supply is at historically low levels compared to demand.
Gasoline supply was a negligible inventory build of 0.4M barrels. The real drama in gasoline today will be implied demand that on a weekly basis has seen numbers fluctuate wildly in the Energy Information Administration weekly reports.
Yet the price of oil hit a 26-year high. No, not crude oil but important stuff like olive oil. Qartz reports that heat and drought in the Mediterranean are harming production of olive oil, causing its price to spike. The global price of oil is now almost $6,000 per metric ton, according to data from the International Monetary Fund (IMF). That’s the highest since 1997, when it reached $6,225. The last olive harvest, from October to February, yielded only 50% of what it typically would in Spain, the world’s top olive oil producer. As a result, the global market could continue to see an oil shortage and higher prices. Damn you climate change!
Is it climate change that is making the Chicago White Sox so bad this year or is it causing wildfires in Alberta? Many climate experts will blame almost anything bad on climate change, so it is probably both. Bloomberg News is reporting that the wildfires burning across Canada’s main natural gas-producing region may trim 0.2 per cent to 0.3 per cent from growth in the country’s gross domestic product in May if much of the area’s output remains shut for the month, one of Bank of Nova Scotia’s top economists estimates. That projection is rough and could evolve as more shutdowns are announced, but the blazes “are going to be messing with the Canadian economic statistics,” Derek Holt, head of capital markets economics, said in a note to clients Tuesday. “We’re getting into the high single-digits of Alberta’s total oil output that is being shut-in, and oil and gas is about 5.3 per cent of monthly Canadian GDP,” Holt said. “There are also effects on prices, including Alberta hub natural gas and Western Canada Select crude oil prices that have been rising as the fires and shut-ins have spread.” Canada’s economic growth already was expected to stall in the middle of this year as rate hikes from the country’s central bank cool activity. Since the production shock is transitory, it “should not impact monetary policy as rebounds and possible rebuilding will follow,” Holt said according to Bloomberg.
We are also seeing a Russia Transneft says that the Druzhba pipeline was attacked but no one was injured according to Reuters citing Russia’s Tass News Agency. The Druzhba pipeline is the world’s longest oil pipeline and one of the biggest oil pipeline networks in the world. Stay tuned.
When it comes to climate change you have to just keep cool. Reuters reported that, “The U.S. power system emits more carbon dioxide over the summer months than at any other time of year due to intense demand for air conditioners and other cooling systems during the hottest time of year. From May through August, U.S. power production systems emit an average of 147.4 million tonnes of carbon dioxide each month as they try to keep the nation’s buildings and homes cool, data from think tank Ember shows. That emissions load is 13% more than the monthly average for the year as a whole, and means that U.S. power producers pollute far more as they try to keep their customers cool in the summer than when they provide energy for heat over the winter. Around 37.8% of total annual power sector emissions are discharged in the four months from May through August, compared with 30.1% for the January to April period, and 32.1% for September through December. Around 90% of the roughly 128 million U.S. households use some form of air conditioning, according to the U.S. Energy Information Administration (EIA) and the World Population Review.
Now before that makes you feel guilty, look at all the lives that have been saved by air-conditioning. In fact they say that the biggest jump in life expectancy in poor countries in history came from the fact that the cost of buying a air conditioner fell below $100 dollars allowing millions to ward off heat stroke.
We are expecting that today’s Energy Information Administration report should be more supportive than the API report last night. Our expectations are that we will see a big rebound in gasoline and diesel demand this week.
Natural gas is still attempting the bottom. The shoulder season fundamentals are still very weak. The EIA in their Short Term Energy Outlook reported that they are forecasting the second most U.S. natural gas consumption for electricity generation on record this summer (May–September), behind last year, and averaging about 38 billion cubic feet per day (Bcf/d). Compared with last month’s forecast, they have increased natural gas consumption for electricity generation by about 2% for 2023 and 3% for 2024.
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