Saving Faces Sometimes. The Energy Report 08/14/2024

Saving faces sometimes pretend to be your friend, saving faces show no traces of the evil that lurks within, saving faces, saving faces sometimes They don’t tell the truth saving faces, saving faces, Tell lies and I got proof. Iran was looking to save face and attack Israel to show how tough they are but so far it appears they really are not so tough after all.

The way to deal with Iran is to show strength and the move by the US and Israel as well as other allies to show strength had Iran seemingly back off its threatened promise to attack Israel. Oh sure, Iran is ok with sending proxies to do their dirty work, like supporting terror groups like Hamas and Hezbollah and the Houthi rebels. Yet when it comes to directly confronting the US and Israel and their allies, they do not seem to have the stomach for it. What a pity. Perhaps because the regime knows that that attack might lead to the elimination of their nuclear programs and perhaps the end of their oil fields and revenue and perhaps even the end of the Iranian terror supporting regime.

Yet the backing down of Iran should be a template with how to make the world a safer place. Stop coddling the Iranian regime, enforce oil sanctions and go back to the Trump policies of maximum pressure. That is the only thing the Iranian regime understands. It’s foolishness to engage this regime by turning a blind eye to oil sanctions and freeing up billions of dollars so they could fund groups like Hamas that prepared the inhuman October 7th attack. Hopefully Iran will stand down and we all see a reduction in tension.

The oil market took out some of the risk premium that had been built in on fears of a major conflict. Yet the market after the close saw some very bullish data from the American Petroleum Institute (API) with big surprise drawdowns in crude oil supply and gasoline supplies. The time spreads suggest a very tight oil market, but the product crack spreads are signally weakness and demand especially for gasoline.

The API reported that crude oil supplies fell by 5.205 million barrels that was lead with a 2.277 million barrel draw down from the Cushing, OK delivery point. Gasoline inventories also fell by a very impressive 3.689 million barrels. Distilling inventories rose slightly at 612,000. Still the oil market is suggesting tightness and Libya’s Waha oil output seems to be dropping to 100,000 barrels a day after a pipeline fire. It is now thought their supplies once again not reliable.

While the International Energy Agency warned us about Chinese demand the US demand and global demand is still going to hit a record high and global oil production only rose by 387,000 barrels a day which is a far cry of what we will need to do to keep up with growing demand. The supply deficit is real and likely will get larger.

Product crack spreads that have been beat up lately seem to be trying to turn, at least for diesel. There is concern about tight supplies and an increased risk to supplies from places like Russia and Venezuela. Yesterday it seemed like gasoline cracks were on a free fall while the diesel cracks looked like they were turning back higher.

Russia reportedly extended their ban on gasoline exports until the end of 2024 partly because demand is better than expected and the fact that Ukraine keeps hitting their refineries Reports say that Ukrainian forces are moving further into Russia. This is raising concerns that this conflict could impact supplies of natural gas and oil at some point. We’re going to stay tuned to this issue.

Yesterday the weak producer price index help support oil with the expectation that the Fed has a clear path to interest rate cuts. Today we get the consumer price index as well as the weekly inventories. If the crude oil inventories come in similar to what we saw from the American Petroleum Institute report, it will be very difficult to drive prices substantially lower. That is unless of course the inflation number comes out hot. There’s still a lot of concern about global demand even though based on the supply side, it seems to be unjustified at this point.

The ingenuity of the US energy industry is amazing. Reuters is reporting that, “Greater operating efficiencies in the top U.S. shale patch are squeezing out more oil without higher spending, according to the latest output numbers, which will boost global oil market supplies as OPEC also plans to unwind its output cuts later in the year. Producers are extending their wells to as much as three miles, squeezing more wells onto a single drilling pad and fracking several wells at once, boosting production, according to industry experts and company executives on recent earnings calls.

Reuters says that taken together, these efficiency gains have led several big producers to raise their full-year shale oil production targets. Chevron (CVX.N), lifted its full-year Permian output target to an about 15% gain, up from an earlier forecast of a 10% gain. Diamondback (FANG.O), APA Corp (APA.O), Devon Energy (DVN.N), and Permian Resources (PR.N), also forecast higher than expected Permian shale production in coming months. Occidental Petroleum (OXY.N), raised its outlook for the basin for 2024 by 1,000 barrels per day (bpd) excluding its acquisition of Permian-focused CrownRock.

Natural gas is hanging in on promises by some producers to cut production. EBW Analytics pointed out that the September contract gained in five straight sessions to post as much as a 20% low-to-high swing before fading Tuesday. Near-term upside is possible, but it may require another bullish catalyst to lift prices over resistance. Still, a rare midsummer EIA storage draw is possible on Thursday, producers shutting-in 2.5 Bcf/d of production helped reinvigorate upside, and August 2024 could feature the smallest August monthly storage injection in history.

Modest upside is favored for the October contract should supply cuts deepen, storage surpluses whittle away, and storage containment fears abate. A wide discount to winter 2024-25 contracts may also offer a degree of support. Yet a cascade of returning supply may quickly rebuild storage surpluses in a normal winter weather scenario. With a gusher of supply likely to add 3.0-5.0 Bcf/d from October to December, the Cal 2025 strip may eventually find itself under pressure absent external support from a cold winter.

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