The global energy markets have gone COVID crazy reacting to every headline that comes out of China regarding the state of their COVID lockdown policies with little thought to global supply or how OPEC might react to plunging oil prices. In a major overreaction, global petroleum markets plunged in reaction to violence in China to protests surrounding the severe Chinese COVID lockdown policies and the realization that the plans to put a price cap on Russian oil seem to be going nowhere. Now, 24 hours later, the markets are surging on reports that China may ease up a bit on COVID restrictions. Chinese President Xi Jinping’ is already blaming lower-level government officials for being too strict on his “zero-COVID” policy.
The AP reported: “The city government of Beijing announced Monday it would no longer set up gates to block access to apartment compounds where infections are found. It made no mention of a deadly fire last week that set off protests following questions about whether firefighters or victims trying to escape were blocked by locked doors or other anti-virus controls. Passages must remain clear for medical transportation, emergency escapes, and rescues,” said a city official in charge of epidemic control, Wang Daguang, according to the official China News Service. In addition, the southern manufacturing and trade metropolis of Guangzhou, the biggest hotspot in China’s latest wave of infections, announced some residents will no longer be required to undergo mass testing. It cited a need to conserve resources. Now somehow the whole market views this as a victory and it’s responding very positively."
The oil market is overcoming the very hawkish statements by the Federal Reserve’s James Bullard that caused a surge in the dollar and added further downward pressure to oil prices. The Fed most outspoken hawk told MarketWatch, “We’ve got a way to go to get restrictive.” Bullard says that interest rates to be between 5% and 5.25% to be “sufficiently restrictive” to reduce inflation.
Europe is still struggling to come to an agreement on a Russian oil price cap. I’ve said before price caps never work and always lead to higher prices and eventually shortages. Poland is calling for a strict price cap by the rest of Europe and wants the price to be somewhere above the current price between $65.00 and $70.00 a barrel. Regardless of the price cap, the truth is that Russia will react negatively to a price cap and restrict supply. In the meantime, Russia is planning to sell more oil to China. Chinese President Xi Jinping this morning is saying that China is willing to boost Russia’s energy cooperation.
In the U.S., supplies are still extremely tight. JODI reported that U.S. crude oil closing stocks fell by 18.90 mb in September and are now at their lowest level recorded in JODI (which begins with data from January 2002). Today the American Petroleum Institute reported on supply and it doesn’t look like things are going to get much better. The report showed the release from the Strategic Petroleum Reserve was smaller than anticipated. U.S. SPR crude inventories fell by 1.4mb w/w to 389.1mb last week.
Oil is also getting support from reports that unnamed OPEC officials are saying that they could make significant oil production cuts to balance the market. Last week’s unnamed sources caused the oil market to fall as it was reported that OPEC was considering a production increase this week. Unnamed OPEC sources are dropping hints of a major production cut. Are we having fun yet?
Natural gas came back on weather models that can’t seem to agree on just how cold it is going to get. Globally, the natural gas market is heating up as Germany makes a move to shore up long-term LNG contracts. This is the same Germany that laughed when President Donald Trump suggested signing a deal for U.S. LNG as opposed to becoming more reliant on Russia. Bloomberg reports that, “Qatar has agreed to supply Germany with liquefied natural gas under a long-term deal that will go a small way to helping the European country replace piped flows from Russia. State-owned Qatar Energy and ConocoPhillips (NYSE:COP) have signed agreements that will see the Persian Gulf state send up to 2 million tons of LNG a year to Germany from 2026. The deals will last at least 15 years, Qatar’s energy minister, Saad al Kaabi, told reporters in Doha alongside Ryan Lance, ConocoPhillips’ chief executive offer.