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
A stark warning from Saudi Arabia’s Prince Abdulaziz to oil speculators to “watch out” and the sudden realization by the RBOB gasoline market yesterday that, by gosh, our gasoline inventories are about as tight they have ever been going into the kickoff of the summer driving season. This caused a big RBOB gasoline rally. Front-month Nymex RBOB gasoline ended at $2.6489 a gallon, the highest settle since April 18. This could start to change the dynamics in petroleum that has been focused on macroeconomic fears as opposed to supply and demand realities.
Prince Abdulaziz bin Salman Al Saud the Minister of Energy of Saudi Arabia warned speculators that they will be “ouching” again as they did in April. He said he’s not a poker player but will not be showing his cards to anyone. This warning is added to the chances that OPEC plus could be planning a surprise oil production cut as other OPEC nations, like Iraq did today, affirm their commitment to the OPEC cuts. RBOB’s price spiked yesterday, and a oil price spike should not be too far behind.
The Saudi Prince only called out oil speculators for having built a near record speculative short position in oil despite evidence that supplies are tightening and demand is rising, but also called out the International Energy Agency (IEA) for their oil prognostications. Prince Abdulaziz said regarding the IEA that, “Even a wrong clock is right twice a day. But when it comes to the IEA, have a special talent for getting it consistently wrong.”
Maybe the IEA gets it wrong because they have lost their mission as a group to secure global energy security and instead have become a shill for the green energy movement. Maybe OPEC has taken exception to the fact that the IEA has called for an abandonment of investment in fossil fuel and then blamed OPEC when we face a looming supply shortage. Or maybe they have taken exception to the admission from the IEA that they hyped climate change data and used the excuse that if they did not hype the data that no one would pay attention to them. Saudi Energy Minister Abdulaziz on the other hand has a clear objective for OPEC saying, ”The three objectives of OPEC+ are vigilance, proactivity and to hedge what may come in the future.
Some could say the same for the Federal Reserve, that they always get it wrong as they famously told us that inflation was transitory. Now the Fed is talking more hawkish despite the run of bank failures they have overseen and that is causing the dollar to rally and is holding oil back as the dollar continues to rise. Federal Reserve Bank of St. Louis president James Bullard said he thinks the Fed should raise rates two more times this year because economic growth is too strong, and inflation isn’t slowing fast enough. San Francisco Fed president Mary Daly says, “meeting by meeting decisions are the most prudent path”.
Yet will oil get a wake-up call, like RBOB futures did yesterday, when they realize we have supplies that are way too tight and the increasing odds that OPEC may add to its production cut after Prince Abdulaziz and make them even tighter. Traders were like, WOW! Gasoline supplies are really tight and demand is a lot stronger than we thought. Where has everybody been the last couple weeks? Why are we shocked that gasoline prices are soaring because of tight supplies except those people who actually read the EIA report. This is the problem, when the market gets out of touch with supply and demand, we see more aggressive spikes in price. Gasoline retailers get crushed the regular people get crushed because of a sharp adjustment.
But for RBOB the warning signs have been there. Felipe Elink Schuurman is CEO and Founder of Sparta has pointed out that gasoline buyers may have been caught short of supply going into Memorial Day. He pointed out that the gasoline arbs to NY have been fully open to all market players since mid-May, with some sporadic dips. This is due to continue as Gulf Coast gasoline supplies keep falling. He is worried that New York buyers of gas are too dependent on Gulf coast barrels and don’t have enough terms deals from Europe on the books, to meet demand. He said that the fact that we will see maximum refinery outputs, but the price impact will only be felt in the third quarter and is something to watch in what he calls this “buy the dip” market environment.
We think we are in a buy the dips mode. The American Petroleum Institute should tell us today at 3:30p central time that oil and gasoline inventories have tightened further and that should provide the floor. The ceiling continues to be the talk of the debt ceiling and Fed speakers that try to talk the dollar higher to keep oil prices and other commodities lower. Yet as the Fed sends signals it wants to slow the economy, the US oil production side is scaling back. We are playing a razor thin dangerous game. If demand really drops off we might be ok but I think you better be protected because this is how damaging oil price spikes are born.
Weather forecasts for rain and cooler temperatures in Alberta are increasing hopes the wildfires may soon be contained and put out. That good news was one reason natural gas prices pulled back. MarketWatch reported that June natural gas dropped 19 cents, or 7.2%, to settle at $2.40 per million British thermal units after posting a gain of just over 14% for last week.
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