Thaw Out! The Energy Report 01/16/2024

Record-breaking bone-chilling cold has reduced oil and gas production in a big way but hopes for a warm-up are keeping prices somewhat subdued. Still, with warnings about the possibility of rolling blackouts hitting Alberta over the weekend and the fact that the wind power in Texas failed, it raises concerns about how we are investing in our future energy infrastructure. Are we forgoing the reliability of infrastructure in the name of politics?

Natural gas has pulled back after a big spike even as production hit a preliminary 11-month low on Sunday according to Reuters and oil production. North Dakota oil production has fallen by an estimated 250,000 to 280,000 barrels per day due to freezing weather, while natural gas output in the state declined by 700 million to 800 million cubic feet per day, the North Dakota Pipeline Authority estimated on Sunday.

Newsweek is reporting that the Electric Reliability Council of Texas (ERCOT), which operates 90 percent of the state’s electric load, urged residents to conserve energy ahead of “tight conditions” as bitterly cold conditions hit the Lone Star State on Monday.

Alberta which sits atop some of the most prolific oil and gas supplies in the world also saw their alternative energy give in and rolling blackouts were avoided only because consumers were forced to cut back on consumption.

Fox Weather reported that, “The deadly arctic assault continues across the U.S., with more than 231 million Americans feeling below-average temperatures Monday as bitterly cold air flows in from Canada and reaches as far south as the Gulf Coast. How cold is it? The FOX Forecast Center says temperatures in the southern Plains have been dropping to levels that haven’t been seen since the Great Freeze of February 2021.” Yet while NOAA is hopeful that an expected warm-up will hang around awhile others are not so sure. Forecaster Ryan Maue writes, “If you’re enjoying the Arctic blast this weekend, then I’ve got great news for you! Another full load of Arctic air will dump on the Eastern US next weekend!

Yet not only are we seeing shifts in the weather. We are also seeing a shift in hedge funds oil bets. Reuters reports that, “Portfolio investors purchased petroleum in the first full week of 2024, reversing sales the previous week and continuing the pattern of choppy trading that has continued since early December. Hedge funds and other money managers bought the equivalent of 54 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Jan. 9. Purchases largely reversed sales of 66 million barrels the previous week, according to records filed with ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

The shift of money managers back to the long side of the market could be a major change in market psychology. Basic hedge funds have been betting on a slowing economy and the drop in demand. This shift towards the long side suggests that maybe they are changing their tune.

Even today, the dollar is rising as the expectation that the Federal Reserve is going to have to maybe put off interest rate cuts and oil is rising. It is rising because the economy is still very strong and if the economy is strong, so too will be energy demand despite hedge fund bets to the contrary.

It’s becoming more obvious that we’re going to face a supply deficit versus daily production. That is going to keep support underneath the market. At the same time, the Biden administration continues to signal that they are going to buy more oil to refill the strategic petroleum reserve. Now add to that geopolitical risk and the possibilities for continued fireworks continue to rise.

And while we continue to throw money at green energy companies, the question becomes is that money is being spent efficiently and who is watching the store. Bloomberg News reports that, “One of the world’s biggest green investment managers is voicing Frustration over some key features of President Joe Biden’s landmark climate law. Impax Asset Management, which hailed the Inflation Reduction Act as a game changer shortly after it was unveiled in mid-2022, now says the legislation has too many built-in hurdles that are delaying implementation and enriching middlemen while leaving less money for green projects.” Those  darn middlemen.

The IRA’s clean-energy tax credits are an important part of the bill, but they’re also “overly complex from a financial structuring point of view and not lending themselves very well towards a replicable, scalable system,” according to Charlie Donovan, senior economic adviser at Impax according to Bloomberg.

OIL Price is reporting that, “The number of commercial vessels that have transited the Red Sea/Suez Canal route has more than halved over the past month amid rising tensions off Yemen, but more than 100 ships, including oil tankers, have crossed the water lane since the U.S. and UK navies advised operators on Friday to steer clear of the route. Amid escalating tensions in the Middle East and the U.S. and UK strikes on Houthi targets in Yemen on Thursday night last week, the largest shipping and tanker industry groups advised on Friday members to stay away from the Bab el-Mandeb Strait while shippers were diverting transit away from the Red Sea en masse again. OIL Price also reported that Hours after targeting a U.S. warship with a cruise missile in the Red Sea, Yemen’s Iran-backed Houthis fired a missile and struck a U.S.-owned merchant vessel in the Gulf of Aden, giving further momentum to the escalation of this conflict. Early on Monday, the Houthis fired a missile at the Marshall Islands-flagged bulk carrier, the Eagle Gibraltar, hitting the port side of the vessel, according to the United Kingdom Maritime Trade Operations, as reported by the Associated Press.

Diesel and RBOB gasoline prices are back on the rise. Gasoline especially could be squeezed as refinery output is probably going to be impacted by the cold. There could be some spot tightness in some of the physical markets for gasoline. On the flip side of that of course, demand might be down because people don’t want to leave the warmth and comfort of their homes. Distillate inventories are going to continue to be below average and the cold temperatures should be supportive. We are looking for supplies to tighten with crude down 2 million barrels as well as products.

Natural gas prices are being driven by weather. The bearish argument continues to be that we’ve seen record production and supplies have been above average. The key for this market is going to be the second polar vortex. If temperatures flip back to below normal temperatures for February and March, as some are predicting, then the so-called surplus of natural gas might be just a memory. There’s no doubt that it’s going to be difficult to overcome the supply surplus. On the flip side of that, the market has not seen a long sustained winner for many years. If you can’t make up your mind then do both.

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Call Phil Flynn to open your futures and option on futures account and to get special updates. The number is 888-264-5665 or email me at pflynn@pricegroup.com.