Despite oil prices plunging to a six-month low, a stark warning from the OPEC Secretary-General Haitham Al-Ghais that the stability of supply is on thin ice should start getting the market back to a sense of reality. That reality is that there is a major risk of the market being undersupplied.
Bloomberg TV reported Al-Ghais said: “We are running on thin ice, if I may use that term because spare capacity is becoming scarce. The likelihood of a squeeze is there.”
OPEC and its partners hold the idle capacity of roughly 2 million to 3 million barrels a day, or about 3% of world output, Al-Ghais said.
Al-Ghais said the talk about demand destruction coming out of China is being exaggerated and that the possibility of fuel switching from natural gas back to oil is going to create a lot of extra demand. “China is still a source of phenomenal growth,” he said according to Bloomberg. “We haven’t seen China open up exactly — there’s a strict COVID-Zero policy, I think that will have an impact when China gets back to full steam.
”That should not be a surprise because in Europe natural gas hit a new record high. If you translate it to crude prices is the equivalent of paying $400 a barrel for oil.
In Germany, they are acknowledging that despite building up their natural gas inventories, it still might not be enough to get them through winter. Bloomberg reported Germany’s gas storage facilities have reached a fill level of 75%, two weeks ahead of schedule, the country’s top regulator said, as Europe’s biggest economy tries to shore up supplies cut by Russia. “The first stage goal has been reached,” Klaus Mueller, president of the Federal Network Agency, said on Twitter. “Gas storage facilities are 75.43% full, the next target is now 85% by Oct. 1.”
Still, oil prices seemed fixated on the possibility that the world is getting closer to a deal with Iran. The market became very volatile as headlines came across as Europe had received the response from Iran and deemed it “constructive.” The market further sold off on reports that the U.S. had received the Iranian response and was studying it.
Yet, it is unclear whether Iran has dropped some of the nonstarter demands from its proposal. On top of that, there is the Salman Rushdie attack that Iran has failed to condemn. For the oil market to sell off before we have a deal and before we can estimate how much oil Iran can bring to the market is probably either overly optimistic or naïve. Oil sellers on this speculation are probably getting way ahead of our skis. That can’t be good on thin ice.
That brings us back to OPEC Secretary General Al-Ghais that said the world can easily consume more oil from Iran and not have it break the market. He said, “Chronic underinvestment for several years is really what’s taken us to where we are today.”
The secretary-general’s hitting on something the Energy Report has been harping on for years – under investment in the oil space is creating this situation where the global economy is going to continue to be on thin ice for years to come. President Joe Biden’s so-called “Inflation Reduction Act” is only going to serve to make the U.S. more dependent on OPEC for supply.
U.S. oil production is going to have some problems on the horizon as well. Reuters is reporting that Shell (LON:RDSa) on Tuesday said it plans to shut a key crude oil pipeline in the Gulf of Mexico that supplies oil to Louisiana refineries for two weeks in September. The Odyssey and Delta crude pipelines will be shut for planned maintenance early-to-mid September, Shell said in a statement. The pipelines transport Heavy Louisiana Sweet crude from offshore oilfields. Switching to other pipelines is not an option, Shell added.
The Odyssey pipeline in the eastern Gulf of Mexico has a capacity of 220,000 barrels per day. It is connected to the Delta pipeline, with deliveries into terminals in Louisiana and to Shell’s Norco refinery, according to the company’s website Reuters.
The American Petroleum Institute (API) was very supportive. It reported some unseasonal flaws in oil products highlighted by a huge 4.480-million-barrel drop in weekly gasoline supplies. Distillate inventories also fell by 759,000 bureaus and crude supplies fell by 448,000 barrels. That report should tear up the Energy Information Administration report and could set the stage for a late-day rally.
Geopolitical risk is also rising UN reports that China’s military is to take part in the military exercise in Russia, and the Russian-Chinese -Iranian alliance is getting stronger every day.
The good news about this ridiculous Sell off in whale and products will give you a chance to get hedged. I believe that the demand destruction that’s being priced into the global oil and gas market is overstated. I agree with the OPEC secretary general and the International Energy Agency that the risk for the global oil market is to the upside. When you have so little spare production capacity there is no room for error.
We need to see prices continue to be strong to encourage the type of investment that we’re going to need to meet demand. This is especially true in the United States where the Biden administration has taken it on itself to continue to penalize U.S. oil and gas industry.
Natural gas prices surged again to the upside as European prices break records and U.S. exports surged while production falters. If oil prices consolidate near these high levels, the reality is that prices could still go substantially higher and very likely could test the all-time high this winter near $15.