Oil prices are bouncing back after the onslaught of Iran nuclear talk hopes and China lockdown news. Yet, none of that might matter if Russia decides to cut the oil and natural gas supply.
Treasury Secretary Janet Yellen and the brilliant Group of Seven finance ministers say they are finalizing plans to put on a price cap on Russian oil in the hopes it would cut Russia’s record-breaking oil revenues. Yet, they had better be careful because such a price cap may cause a much larger problem for Europe and put European lives at risk. Already we have had a very predictable response from the Kremlin that warned that Russia will stop selling oil to any country that supports price caps for Russian oil. Russian ex-President Medvedev on a possible EU energy price cap said, “Russian gas will simply not be available in Europe.” So what is their Plan B, other than freezing to death?
The hard sell-off yesterday in crude oil was enhanced by a lot of rumors that an Iran nuclear deal might be close. Not only did U.S. President Joe Biden call the Israeli Prime Minister to discuss the possibility of a deal, a lot of talk from the Iranian side seemed to suggest that a deal was imminent and that the Biden administration was going to give in to Iranian demands. An advisor to the Iranian delegation negotiator said, “The U.S. knows that the response of Tehran is very responsible the signing of the agreement could happen in a matter of days.”
Yet, Politico reports this morning that, “Tehran has submitted its latest response in the ongoing negotiations to restore the Iran nuclear deal — and the United States is slamming it as a “not at all encouraging” step “backward.” The negative reaction from the Biden administration — as well as European sources — suggests that a revival of the 2015 nuclear agreement is not imminent as some supporters of the deal had hoped, despite roughly a year and a half of talks.” Which is bullish for oil.
Biden is the king of executive orders as he has issued more than any other president in history, pushing through an agenda with a pen is a lot easier than having to put your ideas up for a vote in Congress. Biden’s track record, of course, does not give a lot of confidence that the Iran nuclear deal will be in America’s best interest.
Price cap fantasy and Iranian nuclear deal hopes aren’t going to change the fact that the global supply situation is the tightest it’s been in decades. Traders ask if China is going to shut down or that the global central banks will raise interest rates enough to slow down the economy. Yet, the reality is that price spikes are extremely likely as we head into winter. Some are laughing at the G7 and its proposal to put on a price cap. Russia holds all the cards when it comes to energy, and even now it is sending subtle messages with the shutdown of the Nord Stream Pipeline.
Bloomberg reports that gas flows have resumed, but traders are wary of future shutoffs. Gazprom (MCX:GAZP) has said the only functioning turbine at Nord Stream’s entry point must undergo technical maintenance every 1,000 hours. That’s about every 42 days, with the next check due in mid-October. Only one turbine is capable of pumping gas into the pipeline at the moment, without any backup, which means the safety of the whole system is under threat, according to the Kremlin as reported by Bloomberg.
Heating oil prices that plunged got back into line just a little bit after it was reported that the Whiting, IN, refinery had restarted. We have seen extreme volatility in the products, as well as the oil market. The Energy Information Administration has been underreporting demand by a wide margin in the weekly inventory report as confirmed by their monthly report of huge upward revisions in demand. That confirms and justifies the reality of the inventories that are well below normal in every major category. The biggest downside risk right now to the oil price is a more intensive Chinese lockdown of their economy because of COVID. Concerns about the Iranian nuclear deal look less likely so what we are saying is there are huge upside risks going into winter. Hedgers should be hedged because there are many cases where we could see prices exceed the highs that we saw during the initial run-up to the Russian invasion of Ukraine.
Natural gas had a very supportive report. The EIA said that working gas in storage was 2,640 Bcf as of Friday, Aug. 26, according to EIA estimates. This represents a net increase of 61 Bcf from the previous week. Stocks were 228 Bcf less than last year at this time and 338 Bcf below the five-year average of 2,978 Bcf. At 2,640 Bcf, total working gas is within the five-year historical range.