Price Cap Trap. The Energy Report 06/10/2025

The European Union has a price gap to sell Russian oil at $65.00 a barrel and the price is dramatically below that level. It shows you the futility and the idiocy of imposing price caps in a global oil marketplace. Trying to control a price cap will either lead to a shortage or will be out of line with reality. Commodity prices is a living and breathing animal that you can’t keep in the cage and as the world starts to clamp down on Russia it’s apparent that the price cap issue is like having a drink after a rough day. It might make you temporarily feel better, but it won’t solve any problems.

The FT reported that the European Commission is to propose lowering the Russian oil price cap and banning the use of Nord Stream infrastructure as part of a fresh round of sanctions against Moscow. The commission is due to present its 18th package of sanctions against Moscow later Tuesday, as part of efforts to ratchet up pressure on Russia amid stalled peace negotiations with Ukraine. I guess they’re thinking the 18th time is the charm. I don’t want to go over the definition of insanity right now, but it might be appropriate.

The FT went on to write that, “According to three people familiar with the proposal, the package will include lowering the existing oil price cap from $60 to $45 per barrel, as well as banning the use of Russian energy infrastructure, including the two Nord Stream pipelines.” Despite claims by leaders like Janet Yellen that price caps would deter Russia and impose economic costs, they proved ineffective. Instead, increased production from OPEC and the United States caused prices to fall.

The pushers of the price cap European Commission President Ursula von der Leon and U.S. Treasury Secretary Janet Yellen with  support from Japanese Prime Minister Fumio Kishida and Prime Minister Justin Trudeau all backed the price cap. Some of these folks are the same people that tried to tell you that inflation was transitory and that tariffs would cause inflation, both of which turned out to be not true.

As I wrote on Liberation Day and after, tariffs are not inflationary. I said it then and I will say again, tariffs are not inflationary.

What is inflationary is out of control government spending with no plans to reduce the trade deficit. Tariffs could make some prices go up, but they will make others go down.

In the meantime, it could contribute to economic growth in the United States by leveling the playing field. In an ideal world, free trade is beneficial. However, the challenge lies in implementing free trade when only one country adheres to these principles.   The Wall Street Journal reports that new data showed a modest recovery in sentiment at smaller businesses, reflecting lessening concerns about tariffs and hopes for a boost from President Trump’s tax-and-spending megabill.” But its big and beautiful.

The Trump administration is preparing additional sanctions on Russia, including targeting Moscow’s shadow oil fleet, liquefied natural gas projects, and energy-linked firms. They will not use a price cap.

Oil Price is reporting that the US sanctioning Russia act of 2025 echoes the European Union efforts proposing both primary and secondary sanctions to penalize global entities aiding the Russian trade. The oil market is also getting support from the fact that OPEC’s crude oil production in May increased by less than expected 150,000 barrels per day (bpd) to 26.75 million bpd. That was less than the planned output increase of 310,000 bpd under the OPEC+ agreement. The shortfall occurred because Iraq was compensating for past overproduction, and Saudi Arabia and the UAE raised their output less than their targets. Saudi Arabia made the largest increase with an additional 130,000 bpd.

On the bearish side of the market, there are reports that China’s refinery maintenance is leading to increased inventory levels. Some reports indicate that China’s crude stocks have reached a record high, with May seaborne imports falling below 10 million barrels per day and refining runs dropping to their lowest level of the year. This suggests that the U.S. administration’s sanctions on China are having an impact, highlighting the need for China to negotiate a trade deal to avoid further economic challenges.

Some Like it hot! Especially natural gas bulls. Natural gas futures took a little bit of a tumble yesterday. It’s a weather forecast that isn’t quite as hot as the market would like, according to Fox Weather. Some of the forecasts in the Midwest aren’t quite as hot as originally believed. That is reducing the amount of demand for natural gas for cooling.

Still global gas supplies remain tight with seasonal maintenance underway across Asia Europe and North America and with a falling rig count in the United States.

The market got support from last week report that showed that the total rig count in the United states fell to 559 rigs. That was down 563 rigs from the previous rate. The oil rig had dropped dramatically by 9 rigs to 442 which is the lowest level since October of 2021. Interestingly enough the natural gas rig count did increase by 5 to 114 yet overall its third week of consecutive declines in overall rig counts reflecting a very tepid and nervous approach from firms amid lower oil prices and focusing on shareholder returns. The Permian basin saw rig count reduction to 289 which amazingly was the lowest level since December of 2021. When rig counts decrease significantly, it suggests that a bottom for the prices may be approaching.

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Call Phil Flynn today to open your account. 888-264-5665 or you can e-mail me at pflynn@pricegroup.com.