Oil players and buyers of oil have no sense of urgency, living hand to mouth on the belief that even as the market is starting to tighten significantly, a recession will allow them to buy oil just in time for their needs. The sense is that a recession is coming so they will gamble that a slowdown in demand in the future will allow them to secure supply at a lower price. Banking woes surrounding First Republic and a report that Saudi Arabia is considering lowering their official selling price for oil to Asia in June after raising prices to Asia three months in a row is feeding into that market negativity.
The danger for those buyers will be that if demand exceeds these negative signals, many buyers will be caught short and then will have to scramble to meet their needs. John Kemp at Reuters pointed out that, “Global freight volumes fell at some of the fastest rates for three decades earlier this year, but at the end of the first quarter showed signs of bottoming out if true should also signal more oil demand. Z Man’s Energy Brain pointed out that Valero on their call suggested that demand is on fire with gasoline cells up 16% year over year and diesel sales up 25% year over year. They pointed out that is different from what they are reading in the weekly Energy Information Administration report.
Yet the real drama in the global energy markets is one that will define the economic future for generations. Tensions between the International Energy Agency and the OPEC cartel is on fire. The war about fossil fuel investment or the lack thereof, is leading us into a structural energy shortage that is going to be a major threat to future global economic growth and security.
In early April the IEA criticized OPEC production cuts saying that, “Global oil markets were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge. “The new OPEC+ cuts risk exacerbating those strains and pushing up oil prices at a time when strong inflationary pressures are hurting vulnerable consumers around the world.” Yet is it not hypocritical for the IEA to complain about an OPEC cut when they have called for a divestment from all new investments in fossil fuels.
The latest salvo came yesterday after OPEC Secretary General Al Ghais warned,
“The International Energy Agency (IEA) that the group should be very careful about “further undermining” oil investment that is vital for economic growth. He warned that such comments could lead to oil market volatility in future. He said that OPEC+, were not targeting oil prices but focusing on market fundamentals. Finger pointing and misrepresenting the actions of the oil exporters and their allies was “counter-productive”, he said.
OPEC is correct. The International Energy Agency has not been a good steward of global energy security. The agency has used its data and has been guilty of underestimating demand and overestimating production to create pie in the sky scenarios that could suggest that a green energy economy can succeed.
Yet based on current estimates, the globe is going to see a severe energy shortage caused by fossil fuels because of underinvestment that is somewhere conservatively estimated at $4.7 trillion. The under-investment in fossil fuels has been fed mainly by politicians in Europe that failed to adequately balance the consequences of disinvestment in fossil fuels.
At least Dan Molinski at the Wall Street Journal is giving me some signs of hope. He pointed out that many investors may be getting a moment of clarity and reality writing, “The asset-weighted percentage of ESG funds making the bold decision to get out of fossil fuels altogether has always been less than 20%, and slipped a bit more in 2022, says Goldman Sachs (NYSE:GS). It says the shift is partly due to the realization of fossil fuels’ importance in keeping the lights on, but also the outsized profits fossil fuel investments often achieve. “We view inflationary pressures, supply chain shortages and the Russia-Ukraine crisis, which have fueled outperformance for the Energy sector and underscored the critical societal benefits of reliable power sources, as influencing some of these shifts,” Goldman explains, noting ESG funds with zero-exposure to nuclear are also moderating. Still, more than 70% of ESG funds remain fully clear of gambling and tobacco.” Yes, quit smoking and gambling to save the planet. The problem is that these companies have been gambling on energy sources that will not be sufficient to meet global needs.
Biden, though has been great for oil producers! Not US producers but producers in other countries. He has been great for Iran and Venezuela and the rest of the OPEC plus Russia boys club. Iran is skirting sanctions and have so little respect for the Biden administration that they seized an oil tanker with little fear of retributions. You know, kind of like the kids causing havoc, looting and pillaging in our major cities like Chicago.
Reuters reported that,
“As Iran’s oil exports rise despite U.S. sanctions over its nuclear program, senators from both parties urged President Joe Biden to enable a federal government agency to seize Iranian oil and gas shipments.” Senators Joni Ernst, a Republican, and Richard Blumenthal, a Democrat, said in a letter to Biden that the Department of Homeland Security’s Homeland Security Investigations (HSI) office has not been able to seize an Iranian oil shipment for more than a year.
Venezuela’s energy sector is also doing very well under Biden. Reuters reported that
“Chevron Corp (CVX.N) has stepped up sales of Venezuelan crude oil to rival U.S. refiners, adding PBF Energy Inc (NYSE:PBF.N) and Marathon Petroleum Corp (NYSE:MPC.N) to its list of customers for the crude, vessel tracking, and loading schedules showed. U.S. Gulf Coast refiners, which historically processed Venezuelan oil, have shown a renewed appetite for the heavy sour crude grade after Chevron (NYSE:CVX) late last year received authorization from the U.S. Treasury Department to expand its operations in Venezuela and resume oil shipments to the U.S. after four-year pause. I am sure Iran and Venezuela, and OPEC are all praying for four more years of Joe Biden.