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The Energy Report: Making Russian Oil Great Again

Published 04/30/2024, 09:39 AM

Oil prices, after dipping yesterday on ceasefire talks, reacted to an announcement of the start of an important Canadian oil pipeline and a report that Biden will ease sanctions on Russian banks to allow energy deals to help keep prices lower headed into his election, are now back on the rise as geopolitical risk factors realities resurface. Israeli Prime Minister Benjamin Netanyahu is warning that, “Israel will enter city of Rafah in south Gaza to eliminate Hamas, with or without a ceasefire and hostage release deal.” Mr. Netanyahu says that they have begun evacuating Palestinians from Rafha in preparation for an upcoming operation. Hamas said they will respond in writing to Israel’s ceasefire proposal but are not giving a time as to when they will do so.

The market is now starting to realize that Israel’s attack on Rafha is a match that will be played and asked to increasingly worry about the fallout. This comes as Biden’s administration is showing signs of panic surrounding the potential price spike that may be coming ahead of the Presidential election.

Oil prices took a dip after the Treasury Department renewed sanction relief for at least 10 Russian banks, including the Central Bank, to allow energy-related operations amid rising energy cost. Bloomberg says that, “General License No. 8I allows Central Bank of the Russian Federation; Vnesheconombank; Otkritie; Sovcombank; Russia’s largest state-owned bank Sberbank; VTB Bank; the country’s top private bank Alfa-Bank; Rosbank; Zenit and Bank Saint-Petersburg to engage in production, refinement, transport, purchase of crude oil, natural gas and petroleum products. The License also allows for operations related to coal, agricultural products used to make biofuels, wood, uranium, development, production of power including nuclear, thermal and other sources.

This easing comes after the Biden administration discouraged Ukraine from hitting Russia where it hurts and that is their oil and gas sector. The pressure for Ukraine to quit attacking Russia’s oil and gas infrastructure comes because of that could cause prices to rise.

And of course, as I predicted, the so-called Russian price cap has become an abject failure. Bloomberg News is reporting, “A Group of Seven-imposed cap on the price of Russia oil is becoming increasingly unenforceable, an organization at the heart of the global insurance industry said, offering one of the most direct criticisms yet of measures that were meant to deprive the Kremlin of petrodollars. About 800 oil tankers that were previously covered by member organizations of the International Group of P&I Clubs have migrated into what’s known as a shadow-fleet, the club said in a written submission to a UK government inquiry on the effectiveness of sanctions on Russia. In addition, there’s no way for insurers to check whether traders are genuinely sticking to the price cap. The policy “appears increasingly unenforceable as more ships and associated services move into this parallel trade,” the International Group’s submission said. It “is concerned that increasing responsibility and obligations on companies in the G-7 coalition will result in a further migration of trade activities and ancillary services outside of the G-7.”

The other report that put a little downward pressure on prices was the long-awaited announcement of the start of the Canada’s Trans Mountain pipeline expansion. Reuters reported that Canada’s Trans Mountain pipeline expansion (TMX) is set to enter partial operation on May 1, years behind schedule and at more than four times the original cost – but with the potential to affect oil flows even outside North America. The expanded pipeline will ship an extra 590,000 bpd from Alberta to Canada’s Pacific Coast, giving Canada’s heavy crude producers access to U.S. West Coast and Asian markets, and boosting prices for their grades. I guess this might be a good time to mention that the old Keystone XL pipeline would have been up and running for years helping to ease prices and improve the oil flow. Of course, somebody decided to kill the approval of that at the last minute, I wonder who that might be?

Behind all the drama, we’re also seeing signs of global demand that continues to be strong for oil and suggests a very tight global oil market. Saudi Arabia reportedly feels confident enough to raise prices for most oil grades to Asia. This comes as the OPEC secretary general suggests that crude oil demand will grow by 2.2 million barrels a day in 2024 and confirmed that OPEC production cuts are going to continue through the end of the year. So, more demand and less supplies are normally very bullish.

At the same time we’re continuing to get warnings about underinvestment in future supplies of oil and natural gas. A big part of the reason is politicians that are obsessed with climate targets and not reality. A couple years ago, when I was doing the speaking circuit at different events talking about oil, I used to get a lot of blowback from my thesis that the world was not going to run out of oil. In those days the thesis of “peak oil” was all the rage. Peak oil was the contention that conventional sources of crude oil had already been reached and we were about to reach maximum production capacity worldwide that was supposed to diminish significantly.

“Twilight in the Desert” was a bestselling book about peak oil production in Saudi Arabia and many people believed that the United States oil production was already in an irreversible decline and the country’s economy might collapse if we couldn’t find ways to import more supplies of natural gas. Yet I never believed those doom and gloom predictions and was what you might call a peak oil denier. They said I ignored science, and that oil was a finite resource. On and on they went.

Even though I was in the minority and took a lot of heat for it, I had a belief in the power of the market. That when prices got high enough, we would find a way to find more oil.  I believe that the free market and free market capitalism would drive innovation and even though I might not have known exactly how it was going to play out, I knew that the world would not run out of oil anytime soon and probably not ever. Price and profit incentive would drive innovation and I knew that we would find a way.

Let us fast forward to a report yesterday by the Energy Information Administration (EIA) that would have been the fantasy 20 years ago. The EIA reported that U.S. oil and natural gas reserves hit a record high this year. They said it couldn’t be done 20 years ago but the US oil and gas industry did it anyway. The EIA said that, “U.S. crude oil and lease condensate proved reserves increased 9% from 44.4 billion barrels to 48.3 billion barrels at year-end 2022. U.S. crude oil and lease condensate production increased 6% in 2022. In Texas, which has more proved reserves of crude oil and lease condensate than any other state, proved reserves increased 9% in 2022 (1.7 billion barrels), the largest net increase in any state).

In New Mexico, crude oil and lease condensate proved reserves increased 26%, the second-largest net increase (1.3 billion barrels). In North Dakota proved reserves increased 14%, the third-largest increase (0.6 billion barrels).

The 12-month, first-day-of-the-month average spot price for West Texas Intermediate (WTI) crude oil at Cushing, Oklahoma, increased by 43%, from $66.26 per barrel in 2021 to $94.54 per barrel in 2022.

Proved reserves of U.S. natural gas increased 10%, from 625.4 Tcf at year-end 2021 to 691.0 Tcf at year-end 2022, establishing a new record for natural gas proved reserves in the United States for a second consecutive year. Natural gas proved reserves in Alaska increased 25% in 2022, raising that state’s total from 99.8 Tcf to 125.2 Tcf—the largest increase of all states in 2022.

Natural gas did get a bit of a bounce and stational electric demand hit a near record high for this time of year. Early season cooling demand in the southeast is causing prices to go a bit higher. In 2022, U.S. natural gas exports were 6.9 Tcf, the highest volume on record. Cheap natural gas prices also had a part in lowering the demand for wind generated electricity which fell for the first time since 1990s. U.S. electricity generation from wind turbines decreased for the first time since the mid-1990s in 2023 despite the addition of 6.2 gigawatts (GW) of new wind capacity last year. Data from our Power Plant Operations Report show that U.S. wind generation in 2023 totaled 425,235 gigawatthours (GWh), 2.1% less than the 434,297 GWh generated in 2022.

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