The oil supercycle continues as the seeds of massive under-invest in fossil fuels along with rising geopolitical risks are unveiling an era in energy that is going to be expensive.
The Energy Report has warned of this coming price spike and warned that the Biden administration’s policies of discouraging investment in fossil fuels, especially after cutbacks in oil companies CAP X cutbacks, along with ridiculous energy policies in Europe, would come back to bite us.
We also warned that a rush to get off of fossil fuels and an over-reliance on wind and solar would leave us vulnerable from both an economic and geopolitical viewpoint, and sadly this is happening. Hopefully, U.S. shale can rise to the occasion.
Reports say that OPEC Plus will agree to their planned 400,000 a barrel production increase which sounds nice but raises the question of whether they can actually meet last month’s production target. The Reuters survey reported that OPEC pumped 27.80 million barrels per day (bpd) in December, up 70,000 bpd from the previous month but still short of the 253,000-bpd increase allowed under the supply deal.
Reports are coming out right now that OPEC plus data presented to the JTC Opec plus committee suggests a global oil production surplus of 1.3 million a day.
Yet that assumption that there’s a global oil surplus of 1.3 million barrels a day over demand doesn’t really jive with the fact that we’ve seen global oil inventories fall. In fact, based on global inventories, I would suggest that instead of a surplus, we are at a supply deficit. Reuters reports, for example, that oil storage levels in OECD countries hit seven-year lows in November and we’re on track to fall more in December.
According to the International Energy Agency (IEA) these countries will need to refill those tanks in the coming months.
Yet despite that data OPEC suggests that we will continue to be in a surplus throughout 2022, probably to take a little heat off them from a political perspective. Perhaps they are assuming that the OPEC plus group can finally raise production to a level that actually hits their agreed-upon production targets. I guess you can see why the global oil market isn’t really impressed with the fact that OPEC says they’re going to give us some other 400,000 barrels of production when they can’t even provide the barrels of production that they promised last month.
Yet, with demand exceeding pre-pandemic levels, it is likely that we’re going to continue to see very tight supplies in the new year. The biggest risk to the upside forecast would be a price spike that puts the globe into a recession.
Despite the Biden administration’s warnings that a Russian attack on Ukraine could be imminent, it seems that talks are continuing, and we’re getting mixed signals as to whether or not an invasion will actually happen. The Wall Street Journal reports that the prime ministers of the U.K., the Netherlands, Poland, and the Turkish president are scheduled to visit Kyiv in a flurry of diplomatic activity to deter a possible Russian invasion of Ukraine and find a peaceful way out of the crisis. Oil and gas traders are seeing this situation between Russia and Ukraine as a potentially major event in global energy prices that could have ramifications that could last for years, if not decades. With the global supply and demand balance as tight as it is, really, the global economy can ill afford this conflict at this time. Let’s hope and pray things to calm down.
Robert Hoag says that Ukraine may be a high distraction while the Russians solidify their interests with Caspian energy producers. They will go into Ukraine, but the NATO nations won’t be able to turn to the Caspian nations to bail out their energy needs. LNG takes a great deal of infrastructure and time to expand. Also, Russia and China are building a big pipeline through Mongolia, taking all gas production to Europe. Not opening Nord stream 2 is a huge mistake, and the Germans know it and are keeping their cards close as that is the major benefactor, as they will be reselling Russian gas to Europe for a nice profit.
The Energy Report has been warning users and producers to hedge for upside risk, and now some are saying that the failure to have done so might be devastating to their businesses. Bloomberg reports some airlines, for example, will lose a “shedload” of money on oil. Airlines that aren’t currently hedging their fuel bills are set to lose a “shedload” of money as a result of high oil prices, the head of Ryanair Holdings (NASDAQ:RYAAY) Plc said Monday. Chief Executive Officer Michael O’Leary said on a call with analysts:
“We have seen some spectacular deviations by some of our so-called competitors, arguing that they now will be unhedged because they’ve never made money hedging. Well, they’re about to lose a shedload of money by not hedging, particularly with spot prices up to $91 a barrel.”
For oil, the close yesterday was very technically strong, and even though the market is a bit overbought, one would suggest that we are still in a strong uptrend, and breaks should be bought.
Obviously, after the type of run that we had in January, that was one of the best that we’ve seen almost in the history of oil. We have to be on guard for corrections, but at the same time, we know that supplies are going to be tight, and that should give us some upside potential. Products, of course, have been fighting off some seasonal weakness, but that should be ending soon. We are looking to buy both heating oil and our rbob gasoline futures on breaks. Call to get the price level on both of those.
Natural gas prices soared yesterday on cold weather and concerns about the Russia-Ukraine crisis, but at the end of the day, the Energy Information Administration is saying that supplies have rebounded from low levels. The EIA says that after starting the winter heating season (November–March) below its previous five-year average, Lower 48 working natural gas in storage surpassed its five-year average in mid-December during one of the warmest December on record.
However, colder-than-normal temperatures in early January, along with increased liquefied natural gas (LNG) exports and increased power demand compared with last year, have lessened these gains, and working natural gas is again less than the five-year average. Working natural gas stored in the Lower 48 states totaled 2,591 billion cubic feet (Bcf) as of January 21, based on data from our Weekly Natural Gas Storage Report. As of January 21, natural gas in storage was 25 Bcf, or 1%, less than its previous five-year (2017–2021) average for the week. On November 5, natural gas in storage at the beginning of the heating season was 3,618 Bcf, or 3%, less than its previous five-year average.
Significantly warmer-than-normal temperatures during the early weeks of the heating season lessened space heating demand for natural gas and withdrawals from U.S. natural gas inventories. Heating degree days measure the relative coldness of winter seasons. The National Oceanic and Atmospheric Administration (NOAA) reported 635 cumulative gas-weighted heating degree days for the Lower 48 states from December 3 to 30, or 12% less than (that is, warmer than) the previous 10-year average.
According to data from IHS Markit, natural gas demand in the U.S. residential and commercial sectors averaged 34.5 billion cubic feet per day (Bcf/d) in December, which is 15% less than the previous five-year average. The decreased demand for natural gas in these sectors resulted in lower withdrawal of natural gas from storage than the five-year average.