Winter Warming Warnings. The Energy Report 02/26/2024

Air conditioning demand in February! Well, it is happening in places like Texas and it gave a boost to natural gas but slowed the demand for heating oil because of unbelievably warm weather. The crude oil market is taking in stride supply-side worries such as the fact that the Iranian-backed Houthis hit a UK-owned ship The Ruby mar, a Belize-flagged vessel, that has created an oil slick and could sink, ending its cargo of fertilizer into the sea. The focus on the Fed and its rate path is holding back many commodities even as there are reports of more problems in Libya.

Historically warm temperatures for February have eased concerns about tight distillate supply. Still the larger issue of signs that US oil production might be peaking and the underinvestment in fossil fuels are raising concerns for a coming energy crisis that looms ahead. This comes as traders weigh the impact of new sanctions on Russia and how it will impact global supply as it will become more difficult for India to import Russian oil.

Reports from Bloomberg that, “Libya Protests Shut Wafa Oil Field and Gas Pipeline to Italy is raising concerns that Libya might again cut into global oil supply that is still below average as we see signs OPEC is cutting production. JODI which is ‘The Joint Organisations Data Initiative’ (JODI) reported Saudi crude exports fell by 28 kb/d. JODI also points out that oil production in the United Kingdom fell to a 9-year low of just 550,000 thousand barrels a day.

People in the oil industry are also concerned that U.S. oil production is going to peak out while longer lateral drilling wells have increased productivity per well. It also raises concern that they are leaving precious barrels of oil behind and also raises concerns about a higher decline rate for oil production in the future without more investment in U.S. oil and gas the world is going to most likely be short of supplies.

The Biden administration put sanctions on Russian state-owned shipping company Sovcomflot and knew it could slow exports of Russian crude to India. The company reportedly has been one of the major sources transporting over 68 cargoes of oil to India or 6% of the total Russian crude exports.

John Kemp points out today that, “U.S. oil and gas drilling activity remained steady for the fifth month running in February 2024. The number of rigs drilling for oil averaged 500 and has been essentially the same since October 2023. Rigs drilling for gas averaged 120 and were up marginally from 116 in September.

Reuters is reporting that, “A slump in U.S. refining activity and disruptions to global trade have tightened diesel supplies in recent weeks, dampening historically high U.S. diesel exports to Europe this month.

Difficulties in securing U.S. diesel complicate an existing supply crunch in Europe, which previously relied on Russian fuel exports. U.S. diesel cracks briefly surged to a four-month high of over $48 a barrel this month, crimping arbitrage opportunities to ship the fuel to Europe. Many of Europe’s other suppliers in the Middle East and Asia have been forced to traverse around the Cape of Good Hope due to Houthi attacks on vessels in the Red Sea, adding lengthy delays and making that trade less profitable too. European imports of U.S. diesel fell by almost half this month to 6.65 million barrels, down from 11.44 million barrels in January, which marked the highest level since August 2017, according to analysis by ship tracking firm Kpler.

Climate Crazy! Reuters reports that, “A European Union plan to impose tariffs on high-carbon imports could hurt developing countries in Asia but is unlikely to lead to big reductions in greenhouse gas emissions, the Asian Development Bank (ADB) said in a report published on Monday.”

Oil prices are having a problem of breaking through $80 a barrel. There is some talk that the Biden administration may tap the Strategic Petroleum Reserve if sanctions cause a shortage of oil and if they have to bring oil prices down before the election. The Biden administration is starting to realize that it is much easier to empty their reserve than to refill it as they have had some very public failures in that regard. We do think oil’s going to get into a consolidation phase for a move sharply higher so use the weakness to put on hedges. Look to put on some longer term call options as we expect the supplies to tighten significantly later in the year.

Gasoline prices at the pump eased a little bit after their big sharp increase over the last couple of weeks probably due to the Whiting BP refinery outage. The electronic vehicle revolution seems to be collapsing around us and people have to wonder why in the world we ever thought that it was a good idea to get into a technology that was less efficient than the internal combustion engine.

Natural gas and the glut continues to drive the conversation after Chesapeake talked about cutbacks in production. We know that we’re starting to see the seeds of the long term bottom being sewn. It’s amazing that we were concerned about the potential of a polar vortex just a week ago to the possibility that we’re seeing cooling demands start to impact the price of natural gas. We are looking to put on some longer term options in the back end of the curve and even though they’re thin, you can shop around and get some value.

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