Just a week after Joe Biden failed to secure more oil supply from Saudi Arabia, it appears that the Saudi Arabian-Russia-OPEC alliance is stronger than ever. Bloomberg News reported that Russia's President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman discussed continued cooperation within OPEC+ in a phone call on Thursday, according to a statement from the Kremlin.
According to the statement:
"It was emphasized that further coordination within OPEC+ is important. It was noted with satisfaction that member states are consistently meeting their obligations to support the necessary balance and stability in the global energy market."
While the continued cooperation between Saudi Arabia and Russia is not a surprise, it has to be somewhat distressing to the Biden administration. Biden and his shunning of Saudi Arabia have complicated our Middle Eastern foreign policy and have not helped on the oil production front. He misjudged the importance of the Saudi/US relationship. He also misjudged the amount of oil that Saudi Arabia could bring to the global oil market. Saudi Arabia admitted that they might only have one million barrels a day of spare oil production capacity. Now that Biden has drained our strategic petroleum, that becomes a major risk to the economy going forward.
When it comes to the Strategic Petroleum Reserve, fact-checkers once again have their facts mostly wrong. Fact-checkers who say they are non-political fall all over themselves to protect the Biden administration's missteps on every policy that he implements. These are the same fact-checkers who tried to tell us that killing the Keystone Pipeline, shutting down federal lands for drilling, trying to defund fossil fuels, and pressuring banks not to lend money to them, somehow would not cause energy prices to up. If you made your futures trading decisions based on that, you would have missed one of the biggest moves in the history of oil and gasoline.
Now they're trying to defend the Biden administration's releasing of oil from the strategic petroleum reserve for obviously political purposes. Those that say that the oil was needed because of the war in Ukraine don't understand the history of the Biden administration's SPR release. The fact-checkers are ignoring the fact that Biden released oil from the strategic petroleum reserve in November. That was well before the war in Ukraine. He used the Strategic Petroleum Reserve for political purposes to bring down gasoline prices.
In November, not even one refiner ever asked for oil from the strategic reserve. It was not a shortage of oil per se that was driving up the cost of gasoline. It was a shortage of refining capacity and uncertainty created by the aggressive anti-fossil fuel legislation and executive orders that came down from the Biden White House.
The fact-checkers tell you that it's the government's role to provide the oil for the market when it's needed, but that is a ludicrous statement and not at all what the global Strategic Petroleum Reserves were made for. It is not the government's role to provide oil to the oil market when it's needed. The SPR was not designed as a price control mechanism. The SPR oil was designed to be used in an emergency.
In November, there was no real emergency.
It is even debatable as to whether the war in Ukraine rose to the level of an emergency that dictated a release from the global strategic reserves. It also raises a question as to whether it was wise to release the oil too early in a world where spare oil production capacity is at a historic low.
The government, trying to manipulate oil prices for short-term political gain, will fail. It has failed in the past and will fail in the future. Global strategic petroleum reserves are not big enough or strong enough to control oil market forces. It would have been better to let market forces work on their own without government intervention. While the release may have brought some short-term price relief, the odds are higher that it's going to bring long-term pain in the future. Now both the SPR and global spare production capacity are at historic lows.
Yesterday oil prices had a magnificent ride. First, oil prices were selling off because gas supply resumed on the Nord Stream pipeline from Russia to Germany. Then sold off on political uncertainty as Mario Draghi in Italy resigned as Prime Minister. Then oil rallied when the ECB increased interest rates by 50 basis points. That helped the Euro currency, and the dollar helped the value of crude. Later in the day, crude prices sold off on reports that the EU and Iran were getting ready to restart nuclear talks. Why the market believes that anything will come out of these talks is laughable.
Even Reuters reported that:
"Britain's spy chief said on Thursday he was skeptical that Iran's Supreme Leader Ayatollah Ali Khamenei wants to revive a nuclear deal with world powers but said Tehran won't try to halt talks either. Richard Moore, chief of the Secret Intelligence Service (SIS) known as MI6, said he still believed that reviving the 2015 Joint Comprehensive Plan of Action (JCPOA) agreement was the best way to constrain Iran's nuclear program."
Russia's central bank just cut its key interest rate to 8%, one point more than expected. I guess they have no inflation problems in Russia.
Ok, just kidding.
Russia continues to use its energy dominance over Europe as a weapon, but long term, it is going to backfire as the Arab oil embargo did. The OPEC cartel has a history of causing an oil price shock. That shock will cause countries to change their behavior by reducing consumption and trying to become more energy efficient. The green energy folks think this is going to be a great opportunity for Europe to start building more windmills and putting in more Chinese-made solar panels. We will see a big increase in these energy sources and what's going to happen is Europe is going to be faced with the reality check that they're going to have to find ways to get a reliable supply of fossil fuels and use them more efficiently and cleanly. They're also going to find that if they want to reduce greenhouse gas emissions, nuclear power has to be part of the equation.
Reuters reports that—Germany's government unveiled new energy-saving measures and tightened its gas storage targets on Thursday, fearing that persistently low Russian gas supplies could lead to winter shortages. The measures include a ban on heating swimming pools in private homes in winter, suspending minimum temperature requirements for apartments in rental contracts, and encouraging more people to work from home during certain periods.
There is so much focus on the Keystone Pipeline, yet people have forgotten that we have a lot of pipelines coming down from Canada in recent years. Another one of them is also called the Keystone and may have an impact on oil trading today. Sheela Tobben and Robert Tuttle at Bloomberg News report that TC Energy Corp (TSX:TRP) has reduced operating rates on a segment of the Keystone pipeline running from Canada's oil sands to America's largest crude hub by about 15% following a disruption to power supplies. The rate cut impacts the section stretching from Hardisty, Canada, to Cushing, Oklahoma, according to people familiar with the matter. Clients that receive crude on the systems. Marketlink segment, which runs from Cushing to Texas's Gulf Coast, hasn't experienced any disruptions to deliveries, they said.
Pipeline operator TC Energy declared a force majeure on deliveries earlier this week after the power supply was disrupted to a facility on the system near Huron, South Dakota. No TC Energy-operated facilities were damaged in the incident, the company said in an update Wednesday. A nearby power supplier said one of its substation transformers was damaged over the weekend. A prolonged disruption could pressure already tight inventories at the nation's most important crude hub, which serves as the delivery point for oil futures contracts traded on the New York Mercantile Exchange. A tightening in supplies can trigger sharp rises in prices for crude barrels that are available immediately versus those delivered in the future.
Oil prices are under pressure this morning because of a strong dollar and uncertainty about recession. Pierre Andurand, a famous oil trader, tweeted that:
"For the people worried about the impact of a recession on oil demand and oil prices:1) average annual oil demand growth from 2000 to 2010, and 2010 to 2019 is quite steady around 1.2-1.3mbd. In line with population growth over time (1.1-1.2%) (2016-2019 1.37mbd) ¼."
Natural gas prices have pulled back a little bit, but if you look at the daily chart, it looks very scary. If you use your imagination, natural gas may have put in a major head and shoulders bottom on the daily chart. While it might be too early to get very excited about this formation, if it is completed, it could mean that natural gas prices are headed for a near doubling in the next year.
In case you missed it, the Energy Information Administration's (EIA) take on natural gas is slightly more subdued. The EIA reports that a fire at Freeport LNG's natural gas liquefaction plant led to the full shutdown of the facility on June 8. The shutdown reduced U.S. export capacity by an estimated 2.0 billion cubic feet per day (Bcf/d), and as a result, the U.S. benchmark Henry Hub natural gas spot price fell by $1.27 per million British thermal units (MMBtu) to $8.16/MMBtu on June 9. The Henry Hub price continued to decline through the end of June, ending the month at $6.54/MMBtu.
Prices fell largely because the outage at Freeport LNG decreased U.S. natural gas exports (a factor in U.S. natural gas demand), putting downward pressure on natural gas prices. In our July Short-Term Energy Outlook (STEO), we estimate that U.S. liquefied natural gas (LNG) exports averaged 10.1 Bcf/d in June, a 1.5 Bcf/d decline from May as a result of the outage. We expect U.S. LNG exports to remain below average, at 10.5 Bcf/d in the second half of 2022 (2H22), which is 1.8 Bcf/d lower than in our June STEO forecast. We expect the Henry Hub natural gas spot price will continue to decline from its June average of $7.70/MMBtu to an average of $5.97/MMBtu in 2H2022. We expect a price decline mainly because fewer U.S. LNG exports will likely contribute to a lower overall U.S. natural gas demand outlook.
Amid lower natural gas prices, we forecast natural gas consumption in the industrial sector and electric power sector to rise, offsetting some of the drops in total demand. We expect total demand (consumption plus exports) to be down by 0.7 Bcf/d in 2H22. By the spring of 2023, we expect U.S. natural gas production will increase, and inventories will build back to their five-year (2017–2022) average levels, putting additional downward pressure.
Based on the technical charts, I think the EIA's projections might be a bit optimistic. Stay tuned.