Shattered Ceilings. The Energy Report 03/18/2024

Brent Crude traded over $86 a barrel posting a new high price for the year as bearish narratives around oil and demand and the fallacies of the energy transition have started to fall apart. The oil markets are starting to price the realities of an undersupplied market after the International Energy Agency had to admit that they were way off in its projection of oil demand and OPEC compliance should be improving with a major announcement by Iraq.

There are reports overnight that Iraq’s oil minister is going to reduce its crude oil exports by 3.3 million barrels a day in the coming months to absorb any increase in registered production that they made in January and February. In other words, they’re cutting back production to make up for the cheating that they’ve done previously.

This should offset the extra oil coming out of Russia because of the damage done to their refineries by the Ukrainian drones. Reports are saying that Russian oil exports from its western ports will be up by 10% to 2.15 million barrels a day. Reuters reports that long-range Ukrainian attack drones launched by the SBU domestic security service have hit 12 Russian oil refineries during the war so far, a Ukrainian intelligence source told Reuters on Sunday. Officials in the southern Russian region of Krasnodar said Ukrainian drones had attacked the Slavyansk oil refinery, 70km (45 miles) north of the regional capital, overnight. The Ukrainian source said the refinery, which processes about 4.5 million metric tons of crude a year and produces fuel mainly for exports, had been attacked in an operation staged by the SBU security service and other Ukrainian forces.

At the same time, the inability of the refineries to produce diesel is causing a surge in diesel prices. This morning we also saw a gasoline surge as well and the reports of weak demand were greatly exaggerated.

That means crack and diesel crack looks to be breaking out on the upside as the market is starting to realize that there’s going to be strong demand for both.

This comes on a week when the market must balance ongoing attacks in the Red Sea and how the rising cost of oil is going to impact the Fed’s plan to cut interest rates. Underneath the oil movement, oil stocks are gaining momentum as the ESG movement is facing the reality that it is contrary to sufficient reason. Decisions made by governments surrounding the green energy transition have made it almost impossible for the US to meet energy demand in the short term and long term.

Reuters reported that in February this year, the IEA predicted demand would rise by 1.22 million barrels per day (bpd) in 2024, while in its February report, OPEC expected 2.25 million bpd. The difference is about 1% of world demand. The difference between between the International Energy Agency and OPEC is a major problem the International Energy Agency is having a moment where they have to start to face up to the reality that the world is going to need a lot more fossil fuels than they have originally reported they have to get back to their mission of energy security from for Europe. The energy agencies and their bad predictions fed into the energy and security loss that we’ve seen in Europe.

Now that the market is starting to realize something that we have been warning about for some time, there is extreme risk to the upside. The globe is heading into a supply deficit and that means that we are still going to be very vulnerable to price spikes. Make sure you are hedged. As we mentioned before we thought there was huge value in energy stocks. ExxonMobil has outperformed the S&P 500 over recent months.

Can there be any hope for a natural gas rally? A surprise increase in rig counts is a head-scratcher. EBW Analytics reported that plunging natural gas prices cleared as low as $1.24/MMBtu last week as extremely mild temperatures nationally—more akin to late April than mid-March—slashed demand for natural gas and pulled the April contract lower to retest contract lows at $1.64/MMBtu. Still, a combination of technical support, weather adding 16 gHDDs over the weekend, supply stabilizing at low levels 3.5 Bcf/d below February highs, and peaking storage surpluses may all help the NYMEX front-month find support near-term and attempt to turn higher.

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