Right Behind You. The Energy Report 05/22/2023

Netherlands, Chile, and other nations called on the G-7 to abandon fossil fuels. China, I am sure is saying, go ahead we will be right behind you. Fossil fuel and climate hypocrisy is reflecting a world where craziness has taken over common sense, a commodity that is so rare. In the meantime, the price of oil has been hijacked by talks over the debt ceiling and macroeconomic fears as it ignores record global demand and tightening supply to the global economies peril. Federal Reserve Chair Jerome Powell’s comments that inflation was “far above” the Fed’s objective and European Central Bank President Christine Lagarde said we need to “buckle up” for “sustainably high interest rates” in order to achieve its price target, is weighing on oil prices even as supplies dwindle. That disconnect is making the investment outlook for oil murkier and that is raising the risk of a growing structural supply side deficit that is increasing the odds of an oil price shock and also increasing the odds that OPEC will consider a further cut production. The Iraqi oil minister and the Russian oil minister spoke on the phone and confirmed their commitment to the OPEC plus voluntary production cut according to the Iraqi state news agency.

We are seeing that in the short term the Baker Hughes oil rig count is seeing the biggest plunge since the covid pandemic. Reuters reported that U.S. energy firms this week cut 11 oil rigs, the most in a week since September 2021, energy services firm Baker Hughes Co (BKR.O) said in its closely followed report on Friday. That follows last week’s cut of 17 natural gas rigs, which was the biggest drop since June 2020. The oil and gas rig count, an early indicator of future output, fell by 11 to 720 in the week to May 19, the lowest since May 2022. That means US oil and gas production is more than likely peaking out and it’s likely that US oil and gas production will fall far from EIA expectations. JODI falling reported that US oil production is already falling, dropping by 257 kb/d to 12.22 mb/d and was up 525 kb/d from year-ago levels.

OIL Price reports that while the EIA and others see U.S. shale production rising through the end of 2024, there are some worrying signs that production may already be slowing. The two main drivers of U.S. shale production, DUC withdrawals and the rig count, are in decline while 82% of wells drilled in 2022 were to replace legacy production. That is bad news for the Biden administration that has already failed once in its attempt to buy oil back for the Strategic Petroleum Reserve and reports are suggesting they are failing again.

Bloomberg News reported, “Stiff global competition for sour crude oil is threatening to complicate the Biden administration’s plan to buy up to 3 million barrels to refill the depleted US Strategic Petroleum Reserve. Bloomberg reports that the, “Prices for sour crude — the kind the US government is trying to buy — have jumped amid expectations for the SPR purchases, buoyed by tighter supplies due to OPEC+ production cuts and the startup of new refineries. While the Biden administration is targeting $67 to $72 a barrel, traders said it may end up paying more than that. In an attempt to sweeten the deal, the Energy Department has revamped the pricing method for its plan after a failed attempt to solicit barrels earlier this year. It will now include a combination of the three-day average settlement price of benchmark US crude futures, the benchmark Americas sour crude price and the offer price — a system that will make it easier for traders to hedge using financial contracts. The US plan to refill reserves has helped support oil prices that have been weighed down by expectations of a recession. But traders say the volume of crude is still too small to significantly tighten global markets — particularly since it will focus on buying the kind of high-sulfur sour grades that are in limited supply.”

This week we should see a crude supply drop of close to 3 million barrels of oil, even though we expect to see another big SPR release. Gasoline supply should also fall again by 2 million barrels and distillate supply by 1 million barrels. This is still the calm before the storm. Unless we see a deep recession, we will see a deep hole with demand outstripping supply.

Natural gas supplies should also see an injection of 102 bcf’s. EBW Analytics says that the fundamental bullish catalysts could extend upward momentum after upstream rig count declines and Canadian wildfire shut-ins, late May trending steadily hotter, and a constructive EIA storage surprise—collectively fueled the largest weekly gain since early March. The resulting 31.9¢ short covering-infused rally for the June contract pulled forward upside for natural gas previously anticipated later this year—but whether the NYMEX front-month can hold onto recent gains near-term remains an open question.

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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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