WTI oil prices are back above $86.00 a barrel, and Brent hit the highest level since October of 2014. The market is in breakout mode as oil inventories continue to slip and geopolitical tensions continue to rise. Ukraine and the Fed are driving us higher. While on the one hand, the Biden administration says that they don’t plan to put US troops in Ukraine, they do have more soldiers put on high alert. Other European nations are increasing their troop’s presence in Eastern Europe to try to send a message to Vladimir Putin that if he invades Ukraine, there could be serious consequences. Yet the real consequence for energy price is supply in Europe as well as a risk to the global economy of a potential energy price shock.
The AP reports that Russia warned Wednesday it would quickly take retaliatory measures if the US and its allies reject its security demands and continue their ‘aggressive’ policies, ratcheting up pressure on the West amid concerns that Moscow is planning to invade Ukraine.
One of those aggressive policies could include a cut of oil and gas supplies to Europe and the rest of the world. Germany, in an effort to become more climate-friendly and because of their fears surrounding nuclear power, closed their nuclear power plants and, in what appears to be a fateful decision, dismissed pleas from the Trump administration to not get too dependent on Russia for natural gas supplies. Germany seems to ignore the fact that Russia has cut off supplies to Eastern Europe before, and even this winter, German politicians have accused Russia of withholding supplies.
Bloomberg News reported that the cost of pollution in Europe hit an almost seven-week high amid concern that potential conflict in Ukraine could send the continent’s gas prices surging, making dirtier fuels cheaper to burn. European Union emissions permits are rising toward a record reached in December, as higher gas prices drive the switch to more carbon-intensive fuels such as coal and lignite. Fears over expensive gas can push up demand for pollution permits as generators see dirtier fuels as more profitable.
Inspired Energy said in a note:
“Carbon support has come about in part from the impact of the regional gas-supply crisis. Such strong gains have led to unfavorable power fuel switching dynamics.”
The company also added that coal is set to be cheaper to cover any demand shortfall through to December 2023. Carbon permits rose as much as 2.6% on Wednesday morning to 89.68 euros ($101.19) a ton. That’s the highest since December 9th.
Russia has denied withholding supply saying that they were sending all the supplies that were contracted. Yet, at the same time, they use this to try to get Germany and other European countries to lock in long-term contracts at very high prices. The Biden administration continues to say that they want to use the Nord Stream pipeline as a negotiating tool to try to get Putin not to invade Ukraine. Russia is also saying that they will not use their energy supplies as a political weapon, but that could change based on those comments overnight.
The Biden administration, for their part, may start to learn what the real reason is for the Strategic Petroleum Reserve (SPR). The Biden administration tapped the SPR to try to lower gasoline prices and increase their popularity ratings, and it failed on both accounts.
On the natural gas front, it will be more difficult to come to the rescue. Bloomberg News reported that the US is ready to try to cover significant parts of a potential natural gas shortfall and is ready to engage with other LNG suppliers to ensure flexibility. The Biden administration is saying that they want to make sure that they have alternative supplies of natural gas, warning Russia that weaponizing energy supplies would hurt Russia. Add as I’ve said before, Russia has weaponized supplies before.
Amena Bakr, Deputy Bureau Chief & Chief Opec Correspondent at Energyintel reports that Qatar is unlikely to come to Europe’s aid when it comes to gas supplies. They said no one asked! Biden! Pick up the phone!
Then, of course, you have the US supply situation. The American Petroleum Institute (API) reported that crude supplies in the United States fell yet again. API reported, “The US crude oil supplies fell by 872,000 barrels. The drawdown was a string that has continued for weeks and is raising eyebrows because normally, this time of year is when crude oil supplies increase. Some take solace in the fact that gasoline supplies did increase by 2.4 million barrels last week, yet gasoline supplies are still below normal for this time of year. That is even though we have seen a record string of increases for gasoline supplies.
Distillate inventories fell by 2.2 million barrels, and the cold weather plaguing the country. Right now, one would assume that that supply number should continue to drop in the coming weeks. The bottom line here is that we’re seeing a very tight market for the petroleum side of the sector. This is a situation that we’ve seen coming for some time. We told you a year ago that the Biden administration policies would cause a shortfall of supplies, and that has come true.
The Biden administration really doesn’t understand how the energy industry works. They have to understand that it takes constant investment in the fossil fuel industry to keep US supplies rising. US producers are drilling more, but their productivity per well is falling. It’s going to take massive investment to keep the US as a major oil producer.
Yet that investment continues to get thwarted by the Biden administration, which tries to demonize investment in fossil fuel companies. The Biden administration has used their strong-armed tactics on US banks and companies to stop doing business with US oil and gas producers. They have pressured endowment funds to stop investing in US oil and gas, and while they may think they’re doing it to save the planet, they will kill the economy long before the planet ever dies.
While everyone agrees that we need to have an energy transition, the short-sighted approach by the Biden administration is causing real problems in potential economic risks as well as geopolitical risks like the one that is playing out on the Ukraine border. This is why we’ve been urging users of oil and gas and those that have exposure to prices to be hedged for higher prices. We have repeatedly said that many people saw the need to hedge the risk for higher prices from this year and long before.
Oil prices will also interest what the Federal Reserve does today. Expectations are that the Fed will signal an interest rate increase in March. The big question, of course, is surrounding the dot plot and whether the Fed will increase the amount of interest rate increases they expect this year. We have been getting mixed signals from different Fed speakers over the recent weeks. Yet the Fed has to thread the needle they have to slow down inflation without killing the economy. That’s going to be very difficult, especially with the global shortage of oil and the potential risk of a cut-off of supply due to the Russian- Ukraine conflict.
The natural gas market figured out its cold. Natural gas prices are starting to rise as temperatures are hitting well below zero in many parts of the country. A winter storm that is expected to hit the northeast could also limit natural gas production. Just a few weeks ago, many were downplaying the risk of a winter demand surge. They may have to recalculate their end-of-year storage numbers.