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
Russian President Vladimir Putin must be feeling some relief after an armed mutiny by Wagner paramilitary group ended after they turned back from their march onto Moscow, but not enough. Farmers also saw some relief from drought conditions over the weekend but not enough. So, for the big issues for traders going in the weekend, we are feeling some relief but not enough.
Oil traders have been very confident that despite strong demand and tight supplies and vows that OPEC will make supply even tighter, that global central banks would be successful in slowing the economy thereby allowing the market to ignore the possibility of a looming supply deficit. In fact, one the most surprising bearish factors has been the total failure of sanctions on Russian oil that has flourished despite the sanctions that were supposed to bankrupt the Putin war machine.
Yet even though Russia is exporting more oil than they were before the war, the reality is that the war machine seems to be falling apart after the weekend mutiny. Yevgeny Prigozhin, the head of the private militia Wagner Group, had been critical of Russia’s Generals and Putin for the execution of the war in Ukraine. The move on Moscow ended abruptly with different reports as to the reason why. Some say that Prigozhin decided to pull back in order to avoid spilling Russian blood. Some reports say that there was a deal brokered by Alexander Lukashenko, President of Belarus, to stop the rebellion and give haven to Yevgeny Prigozhin. That was after Russian President Putin promised revenge saying that the group was on a “path of treason” and that, “It is a stab in the back of our country and our people,” promised a harsh response for those planning “an armed rebellion.”
Regardless, at this point there’s more questions than answers and most people believe that this is a huge blow to the Presidency of Vladimir Putin. The Russian people are also getting weary about the war in Ukraine after being promised a quick victory by Putin only to have it continue along with a mountain of body bags filled with Russian soldiers. Prigozhin has been critical of the war effort and has wanted to take a much more aggressive approach in Ukraine and has been critical of the war tactics coming down from the Kremlin.
For the oil market, it’s been kept stable by countries feasting on cheap Russian oil. One cannot discount the potential risk to the global markets if Russian supply is somehow halted. While obviously this isn’t a base case at this point because there’s too many questions about where this mutiny goes. The oil market is not reacting like there’s any imminent threat to supply. Yet the reality is this is another risk against complacency in a market that has been counting on a future drop in demand to meet what will be a big drop in supply. Not only with SPR releases coming to an end and OPEC cuts, but also because of the risk of declining US oil production.
The US rig count took another hit. Baker Hughes reported that the US oil and gas rig count fell by 5 last week and is down by a total of -102 (-13%) since peaking in early December 2022. Reuters says that that should start to reduce output by the fourth quarter of 2023 and into 2024. Shale drillers are pulling back and that is making the EIA prediction on oil production look too optimistic.
This comes as we expect to see drawdowns in US crude supply start to mount in the coming weeks. While we expect another release from the Strategic Petroleum Reserve, they’re pretty much coming to an end. We’re looking to see a three million barrel drop in crude oil supply and we won’t fare too much better on product supplies as we expect both to fall by two million barrels for gasoline and distillate supply.
Bloomberg reported that Russian refineries are coming out of maintenance and processing more crude but they say the caveat to any of the look ahead on Russia is, as noted above, the uncertainty of what happens to Russia overall from what will emerge, one way or another, from the Wagner Group movement. Putting that aside, it isn’t any longer an overlooked theme as we are now seeing regular reporting on how Russian refineries have finished up spring turnarounds, which means increasing refinery runs and more crude oil being processed. And if Russian refineries are processing more Russian crude oil, then it means there should be less Russian crude oil available for export.
Much need rain fell on parts of the drought stricken corn belt and while many traders thanked God for the rain, they all know it’s still not enough, They will need an encore to avert a global food price spike The world looks to the US to feed the world as supplies are historically low levels and this is even more critical considering the events over the weekend with the mutiny in Russia as it could raise questions and risks surrounding Russia and Ukraine’s grain exports. Wheat is the main risk point as the US crop has already been devastated by drought and the world needs all it can get. Concerns about biofuels and ethanol prices are growing.
And with all the talk of the slowing economy AAA says they expect a record-breaking holiday travel weekend for the 4th of July holiday. AAA projects 50.7 million Americans will travel 50 miles or more from home this Independence Day weekend, setting a record for the holiday. Domestic travel over the long weekend will increase by 2.1 million people compared to 2022.
Natural gas is continuing to get support! Hot temperatures in Texas is driving colling demand and testing the grid. EBW Analytics reports that, “after an initial relapse lower to start the week, the July contract surged 30¢/MMBtu from Tuesday’s lows into Friday’s intraday highs despite (i) the week-over-week loss of 16 CDDs, (ii) a bearish EIA storage report, and (iii) enduring weakness in LNG feedgas demand. Instead, the market focus on building Texas heat and rising exports to Mexico—along with the extended downturn in supply—provided a platform for bulls. While technicals suggest $3.00/MMBtu gas is in sight, however, Henry Hub spot prices are clearing closer to $2.00.
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