The Houthis Calling the Shots. The Energy Report 02/27/2024

The Iranian-backed Houthi rebels have not been thwarted from attacking ships on the Red Sea by the Biden administration and seem to be calling the shots in the Red Sea as the global oil supply continues to tighten.

This morning a Houthi spokesman graciously put out a statement regarding talk of a cease-fire in Gaza saying that if, “Israeli aggression stopped, and humanitarian aid could get into Gaza perhaps we could reassess the situation in the Red Sea.” While Biden is eating his ice cream cone, he suggested that the ceasefire could be done by the beginning of the weekend or the end of the weekend. The reality is that Hamas is not saying that they’ve agreed to anything yet. Qatar’s foreign minister seemed flummoxed by Biden’s comments about a ceasefire by Monday and offered no comment but instead said they are working hard to get an agreement, but nothing has been agreed upon yet. Meanwhile, it should be a bit embarrassing that this ragtag group of rebels can continue to call the shots in the Red Sea against the United States, the most advanced military on the face of the earth. It makes you wonder about the stability of the rest of the market and the globe.

Zerohedge reported that, “Biden administration officials speaking with CNN told the outlet that the war is not having its desired outcome, that the Houthis’ military capabilities continue to surprise the White House, and that the Pentagon is unaware of the extent of weapons stockpiles in Yemen. “They continue to surprise us. We just don’t have a good idea of what they still have,” said one senior defense official. Multiple officials revealed the issue is that Washington does not know the size of the Houthis’ arms stockpiles and cannot assess if the hundreds of US bombs dropped on Yemen have impacted the Houthis military abilities. Some administration officials now believe the best way to end the conflict is by ending the war in Gaza, according to CNN.

I think there’s a growing concern about the tightening supplies of oil around the world right now based on what we’re seeing on the time spreads. It suggests a tightening of the market. John Kemp at Reuters points out that the calendar spreads show traders expect crude supplies to tighten significantly throughout 2024 as global manufacturing activity starts to expand again while Saudi Arabia and its OPEC⁺ allies continue to restrict production.

Crack spreads for gasoline and diesel came back yesterday with diesel hitting a 4-month high. The time spreads in oil are pricing in the tightness of crude supplies in Europe. And despite all of the talk about weakness in the Chinese economy, Bloomberg wrote that Chinese refineries have been snapping up cargoes from across the world since the mid-February holiday, according to traders, as well as having increased term supplies from Saudi Arabia for March. There’s been a lot of talk about a rebound in Chinese demand after the lunar new year holiday.

The oil market technically hasn’t broken out of the upside of its range at the risk that it will soon be significant. We expect to see the crude oil deficit start to hit home when refiners come out of maintenance. Signs by the Biden administration that they’re going to be buying back from the oil reserve further out in the curve is probably good thinking because the back end of the curve is undervalued. Yet at the same time the Biden administration may be forced to release some oil from the reserve in the short term because of the tightening market and because they want to try to win an election.

The oil product situation is looking very friendly while the market has to focus on a very real global diesel shortage that has been alleviated somewhat by warm temperatures. It will come at the expense of gasoline. The gasoline price increase that we’ve seen in recent weeks could continue into April.

Reuters is reporting that Russia on Tuesday ordered a six-month ban on gasoline exports from March 1 to keep prices stable amid rising demand from consumers and farmers and to allow for maintenance of refineries in the world’s second-largest oil exporter. The ban, first reported by Russia’s RBC, was confirmed by a spokeswoman for Deputy Prime Minister Alexander Novak, President Vladimir Putin’s point man for Russia’s vast energy sector.

While the Biden administration puts a pause on LNG export approvals, Qatar is acting fast to fill that void. Axios reports that Qatari officials unveiled plans to further expand its liquefied natural gas export capacity — something that’s become a politically charged topic in the United States. Why it matters: The announcement Sunday is a bet on robust long-term demand driven by Asia.The latest: State-owned QatarEnergy is adding another 16 million metric tons annually of production by 2030, which would bring its total to 142 by decade’s end. “We still think there’s a big future for gas for at least 50 years forward and whenever we can technically do more, we’ll do more,” energy minister and QatarEnergy CEO Saad Sherida Al-Kaabi told reporters in Doha, per Reuters. The big picture: The U.S. last year became the world’s largest LNG exporter, ahead of Qatar and Australia, with shipments pushing or even exceeding 90 million tons.

Reuters also reports that, “A more than 25% slump this year in northwest Europe’s benchmark natural gas price has helped push the price of gas-fired power generation below the cost of coal-fired generation, and sets the stage for fuel switching by key regional power producers. Utilities that operate networks of both gas and coal-fired plants, such as in Europe’s largest economy Germany, are likely to dial up generation from gas plants and cut back output from coal plants in response to the swing in operating costs.

Natural gas got a boost ahead of the positioning of the merged contract and signs that production is topping out at least in the short term. We could have the market find the bottom. Still, at the end of the day though, if we don’t see demand for natural gas pick up, the glut is going to get larger. That could potentially lead to another price crash later on but at least in the short term, because of the excessive fund short position, the possibility of a rally is very possible. We like puts and calls. Calls out in November and puts for May.

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