Cross Currents. The Energy Report 03/07/2024

The possibility of a Fed rate cut along with tightening US crude oil  supply and rising demand was enough to give WTI oil another run above $80 a barrel before banking concerns caused a retreat in a global oil market where geopolitical risk is red hot. Israel-Hamas ceasefire talks have gone nowhere and the Iranian-backed Houthi rebels who sunk their first ship now have their first murder as they killed at least three crew members on a commercial ship in the Gulf of Aden. Also there are reports of a refinery explosion in Iran. New York Community Bancorp, in the city that doesn’t sleep and where Gov. Kathy Hochul must call in the National Guard to keep the subways safe, received $1 billion from a group of investors including former Treasury Secretary Steven Mnuchin, in a bid to shore up confidence in the troubled regional lender according to the Wall Street Journal.  That seemed to shake the stock market just a bit and oil even as gold, silver platinum, and palladium soared. Big drops in US distillate and gasoline supply on a pick weekly uptick in gas and diesel demand should start to concern consumers.

The Energy Information Administration warned that reduced U.S. refining activity has put upward pressure on prices as U.S. refinery utilization has decreased by 11%, falling as low as 81% during the last two weeks dropping briefly below the five-year. Even as the U.S. retail average prices for gasoline and diesel are below 2023 prices. That is because oil prices have been low due to rising US oil and gas production, which was caused by US oil company innovation and not by any help from the US government. US oil production dipped back last week, and many US oil producers are fearing that Biden’s methane taxes force many US oil producers out of business leading to a sharp decline in US oil production.

The Methane Tax was created in 2021 and tucked into the so-called Inflation Reduction Act (IRA) that failed to reduce inflation and actually had the opposite effect. Now it’s doing the same thing with methane emissions as the EPA expects it will just make products cleaner but in reality, will force producers out of business and give more market share to foreign producers who will no doubt pollute more. The tax started in 2024 at $900 per metric ton of methane released above the regulatory threshold of 25,000 metric tons of carbon dioxide equivalents per year. The fee increases to $1,200 in 2025 and $1,500 in 2026 and beyond.  The drillers are warning that as the taxes rise the US production will fall. That will help OPEC and Russia.

This comes as the Biden administration looks to try to tighten sanctions on Russia but may turn a blind eye to Venezuela which failed to live up to its agreement to run a free and fair election. I know you are shocked. I mean if you can’t trust a guy like Venezuelan President Nicolás Maduro, who can you trust? Reuters is reporting that Chevron is back to drilling in key Venezuelan oil fields as the company plans to drill as many as 30 wells in production boost production even as Biden threatens more sanctions. Apparently, like the rest of the world, Chevron must not take threats from the Biden administration too seriously. Just Don’t.

The Energy Information Administration has warned that reduced U.S. refining activity has put upward pressure on prices as U.S. refinery utilization has decreased 11%, falling as low as 81% during the two weeks ending February 9 and February 16, and briefly dropped below the five-year (2019–23) low. Although U.S. retail average prices for gasoline and diesel are below 2023 prices for this time of year, decreasing regional inventories for the major U.S. refining regions increased retail prices for both fuels last month, according to our Gasoline and Diesel Fuel Update.

The sharp decline in refinery utilization is the result of reduced plant operations in both the Midwest and Gulf Coast regions and more intense seasonal patterns. The decline is also affecting inventories. Reuters reported that, “One of Turkey’s mid-sized Mediterranean oil terminals – the Dortyol terminal – will no longer accept Russian imports after receiving record volumes last year, amid an increase in sanctions pressure by the United States. Turkey has become one of the biggest importers of Russian crude and fuel since 2022, after the West imposed sanctions on Moscow for the invasion of Ukraine. Russia responded by re-routing oil away from Europe and the U.S. to Asia, Turkey and Africa.”

China’s oil demand remains strong. Argus Media reported that China’s Jan-Feb crude imports rose by 3pc from a year earlier on the back of firm demand before the Lunar New Year holiday. Crude imports during the first 2 months averaged 10.74 million barrels a day.

Reuters is reporting that, “At least two people were injured in an incident during a maintenance operation at the Aftab oil refinery in Iran’s Bandar Abbas, Iranian state media outlets reported on Thursday, citing the operating company. Earlier, the Iranian state news agency IRNA said several people had been killed and injured due to an accident there, but cautioned there had been no official statement. Several state media outlets later described it as a “partial incident that happened during a maintenance operation”, without giving details of what that entailed, and said there were at least two injured, with no mention of any dead.

The EIA put U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.4 million barrels from the previous week. At 448.5 million barrels, U.S. crude oil inventories are about 1% below the five-year average for this time of year. Total motor gasoline inventories decreased by 4.5 million barrels from last week and are about 2% below the five-year average for this time of year. Both finished gasoline and blending components inventories increased last week. Distillate fuel inventories decreased by 4.1 million barrels last week and are about 10% below the five-year average for this time of year.

The natural gas drama can continue as the market tries to balance the potential for more US production declines versus the possibility of more of a glut if demand doesn’t materialize. The long-term impact of LNG pauses on projects will be a problem for the market as it needs investors to keep the US viable is upping their LNG exports facilities.

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