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The Energy Report: Forever Yours Faithfully, OPEC Plus

Published 01/04/2024, 09:13 AM

Refiner runs into the midnight sun, wheels go round and round. Staying faithful when the world is falling around you can be a beautiful thing. OPEC and non-OPEC renewed their oil-cutting vows in what was an almost touching reaffirmation of their unity in what they called its “Declaration of Cooperation”.

The OPEC-plus commitment to stay together and cut production even in the face of losing market share almost sounds like something you might see in a Hallmark Movie as they promised to stay committed against seemingly incredible odds and the potential of losing everything. The market took that as bullish as many doubted OPEC Plus Russia’s resolve.

Yet at the risk of coming off as the non-sentimental type, I think that OPEC Plus knows what they are doing. This is a cold and calculated move that is designed to regain control of the global oil markets by controlling all the world’s spare oil capacity at a time when the risk to global supply is higher than it has been in at least 50 years. That will give the cartel a large influence and clout over the global economy and can use its ability to control prices as a political tool to wield influence over its advisories.

Not only is the Red Sea being effectively shut down by the Iranian-backed Houthi rebels, but we also have seen Libya’s Sharara oil field which was producing 300,000 barrels a day, get shut down due to political protests. Iran is vowing revenge because of the bombing at the memorial service for General Soleimani that killed many people.

Iraq is vowing revenge against the international coalition after the US bombed Syrian bases that have attacked US installations. US bombed the Iranian Hezbollah groups in Iraq that attacked US bases in  Northern Iraq injuring US forces. Barrons reported that:

“The Iraqi armed forces hold the forces of the international coalition responsible for this attack,” Prime Minister Mohamed Shia al-Sudani’s office said in a statement, labeling it a “dangerous escalation and aggression”.

The White House is making a preemptive strike by warning that the so-called turmoil in the Red Seas could hit the US Economy. As we know supply disruptions in the Red Sea is going to put further upward pressure on inflation as the price of goods will rise.

The Wall Street Journal reported that the U.S., Britain, and key allies issued what officials described as a final warning to the Houthi Yemeni rebel group Wednesday to cease its attacks on international shipping in the Red Sea or bear the consequences.

“Ongoing Houthi attacks in the Red Sea are illegal, unacceptable, and profoundly destabilizing,” says the statement issued by more than a dozen nations. “The Houthis will bear the responsibility of the consequences should they continue to threaten lives, the global economy, and the free flow of commerce in the region’s critical waterways.”

Tanker Trackers is reporting that, “In hopes of not being targeted by Houthi militants, a Greek-owned tanker that departed Russia is currently broadcasting over AIS that it has nothing to do with Israel.” I am not sure I would want to write an insurance policy on those ships.

At the same time, the ISM manufacturing data didn’t seem to be as bleak as what we saw from S&P Global yesterday. According to Reuters, U.S. manufacturing did contract further in December, yet the pace of decline slowed amid a modest rebound in production and improvement in factory employment.

The Institute for Supply Management (ISM) said on Wednesday that its manufacturing PMI increased to 47.4 last month after being unchanged at 46.7 for two straight months. It was the 14th consecutive month that the PMI stayed below 50, which indicates a contraction in manufacturing. That is the longest such stretch since the period from August 2000 to January 2002.

Yesterday the American Petroleum Institute report did show a major league  7.418 million barrel crude draw but that also substantial builds in diesel of 6.686 million barrels and  6.686 million barrels in gasoline raised eyebrows. The market immediately speculated that the builds in products were due to year-end tax considerations as refiners are taxed on inventory. Crack spreads and product prices held firm after the report. Also many believe that the API had to square their books at the end of the year as they were probably running behind on their reporting.

Bottom line, OPEC is following through with their production cuts that began on January 1 and with the fact that we believe the dictations in both China and the inventories tighten more dramatically in the coming week if indeed we see the situation in Libya continue for some time, it’s going to take its toll on global inventories. Red Sea delays are also going to cause supplies to Tighten. This is why you need to be hedged. We cannot afford more supply disruptions in this tight market.

Natural gas prices are soaring again as winter weather is approaching. Not only that, we are seeing signs that natural gas production could be easing off record highs. 

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