Oil prices took a big drop on reports that Saudi Arabia had a change of heart regarding whether or not they would raise oil production to offset a drop in Russian oil output. Last night the FT reported that Saudi Arabia would pump more oil if Russian oil output falls.
"Saudi Arabia has indicated to western allies that it is prepared to raise oil production should Russia's output fall substantially under the weight of sanctions, according to five people familiar with the discussions."
This is from the kingdom that previously said that OPEC couldn't pump enough oil to offset a drop in Russian oil production. Gee, I wonder what gave them this change of heart? Well, is it because Biden is now thinking about visiting Saudi Arabia and most undoubtedly will have to bend over and kiss Crown Prince Bin Salmans's ring or something to that effect? Bloomberg News reported that:
"Joe Biden is likely to visit Saudi Arabia later this month as part of an international trip for NATO and Group of Seven meetings, according to people familiar with the matter, with record-high US gas prices weighing on his party's political prospects".
This is a major reversal of Biden's Saudi Arabia policy as this supposed diplomatic expert was supposed to make Saudi Arabia a 'pariah state.' It was also a reversal of his policy to snub Crown Prince bin Salman over his alleged involvement in the murder of Jamal Khashoggi, the Saudi dissident, journalist, and columnist for The Washington Post, former editor of Al-Watan and former general manager and editor-in-chief of the Al-Arab News Channel. Yet that seems to have backfired as the Biden administration is starting to understand that if you restrict investment in US oil and gas and kill pipelines and put on more burdensome regulations and red tape, you are going to need Saudi Arabia more than ever to keep your economy going. When you pull back on US oil and gas dominance, of course, you become more dependent on Saudi Arabia.
Because of strained relations with Biden, Saudi Arabia has failed to respond to desperate pleas from the White House to raise oil output. Back in November, Biden tried to send Saudi Arabia a message by releasing oil from the Strategic Petroleum Reserve as a scare tactic for the kingdom, but that message failed to scare Saudi Arabia and failed to bring down oil and gas prices. This is the White House that says that their energy policy and Saudi Arabia's policies have no impact on rising gas and oil prices and that no one could have predicted this price spike – even though The Energy Report writer did!
That is the same way that they say that no one could have predicted that a rapid withdrawal from Afghanistan would be a disaster – except for his generals that he failed to listen to – or that no one could have predicted that their policies would raise gas and oil prices and inflation – even though Steven Rattner, who served as counselor to the Treasury secretary in the Obama administration and Larry Summers, former Treasury secretary to the Obama administration – did.
Steven Rattner said that Biden's $1.9T American Rescue Plan was an 'original sin' that set off an inflation crisis. Or that no one could have predicted baby formula shortages when the Abbot production facility closed – even though industry insiders said they did – or supply chain shortages.
Of course, no one could predict this, especially if you dismiss anybody who disagrees with you. When you fail to listen and dismiss out of hand anyone who does not agree with you, no wonder you think no one could have predicted this. When you live in a bubble with a false reality, is it any wonder that when the real-world hits, it is not very nice. And in the real world, it might be nice if Saudi Arabia raised output, and that might be the good news. The bad news is that if Saudi raises output, we will reduce global spare production capacity to almost historic lows. The US has already drawn down SPR to the lowest levels since 1980 and has encouraged other countries to do the same.
There is even debate as to how much spare capacity the Saudis have. Most would agree that it might be as much as 2 million barrels a day on the high end, yet some believe it is less than half of that. The UAE also has some spare production capacity, but if they use that, where is the global shock absorber going to come from? We should also point out that OPEC can't even pump its quota right now. This is very dangerous to have no global spare production capacity.
We should also point out that even with a 5 million barrel release from the SPR last week, the US can't seem to build a crude supply. The API reported that the US crude supply fell by 1.181 million barrels. Gasoline supply also fell by 256,000 barrels, and distillates fell by 858,000 barrels. Today, because of the Memorial Day holiday, we will get the EIA Petroleum Status Report at 10a central time and the EIA Natural gas report at 930a.
OPEC will be key today. We think that any selloff due to OPEC news will be a buying and hedging opportunity. It will also be bullish for the back end of the curve, so look to try to work out into the future.
Natural gas has been swinging, but it still has a very bullish fundamental setup. Reuters reports that global natural gas markets are going through a "structural change," Ezra Yacob, Chief Executive Officer of EOG Resources (NYSE:EOG) said on Wednesday, pointing to fuel switching and energy shortages in Europe that have highlighted the need for fossil fuels.
Reuters says that gas prices have surged in recent months following Russia's invasion of Ukraine, which Moscow calls a special operation.
On Wednesday, U.S. Henry Hub futures traded around $8.641 per mmBTU, up from $3.075 per mmBTU a year ago.
At Bernstein's Annual Strategic Decisions Conference, he said:
"I think underlying gas, you're seeing a bit of a structural change. It has to do with coal-switching and obviously kind of an awakening, let's say, in Europe right now of realizing that policy was pushing the transition a little bit faster than technology could deliver."
EOG 2020 announced that its Dorado discovery in south Texas could have around 20 trillion cubic feet of natural gas. The company in February also expanded a gas supply agreement with LNG producer Cheniere Energy (NYSE:LNG) for its Corpus Christi facility. Yacob told investors he expected discipline to hold in the North American exploration and production industry. He anticipates EOG to grow its oil production by roughly 5% this year.
The CEO said the company could invest more and grow its output, but it would erode capital efficiency. Yacob said the company experienced a 5% to 10% additional cost increase this year on the 10% to 15% inflation it had initially forecasted:
"The struggles right now are fundamental. They are operational. They are on the supply chain side."