The Energy Report: Hear Commodities Roar

The commodity markets have awoken from their brief slumber and are roaring ahead of Federal Reserve Chairman Jerome Powell’s speech on Friday in Jackson Hole. Not only are global commodity markets being impacted by geopolitics and global interest rate decisions but also by Mother Nature. Drought and frost are reducing global supplies.

Coffee is surging due to potential frost in Brazil in a crop that was already expected to be smaller than usual. Grain prices are rocketing around the globe as rumors from the Pro-Farmer crop tour suggest that heat and drought in the United States will reduce the yields of just about everything in the next USDA agricultural report. This comes at a time when the world looked to the U.S. farmer to provide a buffer to offset the risk of supply loss from war-challenged Russia and Ukraine.

Yet let us get back to the oil market where Brent prices are back above $100 a barrel because of the Saudi Arabian OPEC-Plus put.

Saudi Oil Minister Abdulaziz bin Salman Al Saud’s warning to the market that it would not stand idly by while future prices became disconnected from the cash market has forced traders and investors to face the current supply tightness reality as opposed to some concerns about diminishing demand that could potentially happen in the future. 

Not only that, traders that have been selling oil on the potential that an Iran nuclear deal could flood the market with oil were offset by pledges by at least eight members of the OPEC plus cartel that said that they would reduce their oil production to allow Iranian barrels back on the market without crashing the price. That has made being short the oil market a much more dangerous position.

The market’s preoccupation with potential demand destruction really is in direct opposition to the reality that supplies are desperately tight now. Just look at yesterday’s American Petroleum Institute (API) report. The API reported that crude oil supplies fell by 5.632 million barrels of distillate inventories this week. That drawdown is disturbing because it came as the SPR released 5.4 million barrels of oil from the reserve last week. Biden has drained the U.S. SPR down to its lowest level since January of 1985. His use of the strategic petroleum reserve may prove to be a historic blunder, especially if the United States faces any supply risks due to hurricanes or other unforeseen calamities.

The White House seems optimistic when it comes to inflation. The White House warned that the consumer price index (CPI) would rise by 6.6% in 2022, but next year they expect inflation to hit only 2.8% and the year after, 2.3%. Those are optimistic predictions by the White House. Everybody loves the White House predictions on inflation because they’ve been so uncannily accurate on inflation in the past. Not, not really.

Other data from the API reports suggested that crude supplies in cushing, OK rose by 679,000. We saw a very modest increase in gasoline supply to the tune of 269,000 barrels, and we also saw an increase in distillate demand by 1.051 million barrels obviously, these numbers for products are bullish because this time of year, we’re supposed to see bigger increases in these supplies. That is not happening, and that’s another reason to be bullish on this market.

Natural gas prices surged above $10 for the first time since 2008. It hit 1002.8. I am sure ticking off some stubborn short stops before profit-taking sets in. Yet it was an update from Freeport LNG Development, L.P. (Freeport LNG) that caused a fast, sharp drop in price. 

Freeport LNG Development, L.P. (Freeport LNG) said they completed a detailed assessment of alternatives for resuming operations at its liquefaction facility following the June 8th incident and has identified a recovery plan for reinstatement of partial operations that it believes ensures the long-term safety and integrity of the facility, provides recovery execution certainty and minimizes procurement and performance testing risks. Although typical construction risks could impact the recovery plan, it is anticipated that initial production can commence in early to mid-November and ramp up to a sustained level of at least 2 BCF per day by the end of November, representing over 85% of the export capacity of the facility. 

The recovery plan will utilize Freeport LNG’s second LNG loading dock as a lay berth until loading capabilities at the second dock are reinstated in March 2023. At that time, we anticipate being capable of operating at 100% of our capacity.

That is later than originally signaled, and that caused a sharp selloff.

Yet it’s not that later, and we know that demand for natural gas will keep supplies tight. In fact, the EIA reported that U.S. electricity generation from natural gas hit a record in mid-July. EIA says that in the U.S. Lower 48 states, electric power generated by natural gas-fired power plants reached 6.37 million megawatt-hours on July 21st, 2022, according to our Hourly Electric Grid Monitor. Despite relatively high natural gas prices, demand for natural gas for electricity generation has been strong throughout July because of above-normal temperatures, reduced coal-fired electricity generation, and recent natural gas-fired capacity additions.

In July 2020, the Henry Hub natural gas price averaged $1.77 per million British thermal units (MMBtu). This July, the natural gas price averaged $7.28/MMBtu. Typically, higher natural gas prices reduce natural gas price competitiveness relative to other sources, especially coal. This summer, coal-fired power plants have not been used as much as in prior summers. Continued retirements of coal-fired generating plants, relatively high coal prices, and lower-than-average coal stocks at power plants have limited coal consumption. In May, coal inventories at power plants averaged 20% lower than the prior-year levels.

New capacity has increased the availability and use of natural gas-fired electricity. Over the past ten years, developers have added about 62 gigawatts of combined-cycle gas turbine capacity. The increased number of combined-cycle gas turbines in use has led to efficiency gains and fewer conversion losses, which means more electricity can be generated from the same amount of natural gas. In Italy, Mario Draghi it’s still betting that a price cap will somehow keep prices under control. Mario Draghi says that the plan will be presented at the next EU council. He claims that Italy can cut its Russian gas imports to zero by the fall of 2024. the problem is how many people will freeze before then.