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The Energy Report: Omicron Away

By Phil FlynnCommoditiesDec 06, 2021 10:06AM ET
The Energy Report: Omicron Away
By Phil Flynn   |  Dec 06, 2021 10:06AM ET
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Momma don’t take my Omicron away!

Oil prices are trying another comeback as Saudi Arabia showed enough confidence to raise their selling price for oil and reports that the Omicron variant bark is worse than its bite.

The Wall Street Journal reported that, “U.S. chief medical advisor Anthony Fauci said that there didn’t appear to be a 'great deal of severity' to Omicron. US regulators said Sunday that the Food and Drug Administration planned to streamline authorization for revamped vaccines. Also, there are no reported deaths caused as a direct result of the variant, so the odds of major lockdowns have gone down. So the rumors of massive oil demand destruction have been greatly exaggerated.

Saudi Arabia is trying to prove that they are not afraid of the variant. Bloomberg reported that Saudi Aramco (SE:2222) increased January’s prices for all crude grades that will be shipped to Asia and the U.S., according to a statement from the state producer. The company raised its key Arab light grade for customers in Asia by 60 cents from December to $3.30 a barrel above a benchmark.

You may also be shocked to know that reports suggest that the Iranian nuclear talks are not going so well. Reuters reported that,

“U.S. Secretary of State Antony Blinken on Friday said that the latest round of Iran nuclear talks ended because Iran right now does not seem to be serious about doing what is necessary to return to compliance with a 2015 deal. Blinken, speaking at the Reuters Next conference, said that the United States would not let Iran drag out the process while continuing to advance its program and that Washington will pursue other options if diplomacy fails."

Now, while I believe that oil prices should come back substantially, we still have some technical resistance up above. Not only did the sell-off in oil damage the charts, but it damaged the confidence of whale buyers. The funny part about that is that if demand destruction fails to happen, the market’s probably gonna be undersupplied by 1 1/2 to 2 million barrels of oil a day. Even talk of the increase in production by OPEC plus Russia is not going to make a difference because let’s face it, OPEC plus Russia can’t even pump their quota right now.

Natural gas prices are getting crushed as temperatures are warmer than normal in many parts of the country and forecasts say they are staying that way. Natural gas prices are lower than they were in July.

EBW Analytics reports that the January natural gas contract imploded last week, shedding $1.345/MMBtu (-24.6%)—the worst weekly loss in over a decade. While the front-month had already been poised for steep losses, the weather shift that eviscerated 86 Bcf of gas demand amplified downward pressure.

Attempts at a relief rally on Friday quickly lost steam. Moreover, as of Sunday evening, the additional loss of 11 gHDDs over the weekend is likely to augment downward momentum. While shorts may take profits at any point, it is entirely possible that the January natural gas contract could plummet $2.00/MMBtu—from $5.562/MMBtu towards $3.56/MMBtu within the space of two weeks.

Yet in Europe, there is a panic. Dan Graber reports that the head of Europe’s largest operator of natural gas storage sites told the Bloomberg news service on Dec. 3 that cold winter could be a disaster for the Continent.

 Depleted storage levels and concerns about steady levels of supply have put a substantial premium on the price of natural gas in the European economy. The January gas delivery contract at the Dutch TTF hub was dropping during the Dec. 3 session to trade in the lower €91 (US$103)/MWh range, though prices at this point last year were in the upper teens.

Marco Alvera, the CEO of Snam (OTC:SNMRY), Europe’s largest gas storage operator, said cold winter and the subsequent increase in demand could deplete gas storage levels to a “dangerous” point. “If this is a cold winter, we’re in real, real trouble,” he told Bloomberg.

Gas flows from Russian energy company Gazprom (MCX:GAZP), one of the leading natural gas suppliers to the European market, hit a six-year low last month and are down 24% year-on-year. From January through November, exports are about 11% below pre-pandemic levels.

Bloomberg reported the Italian government warned earlier this week there may be blackouts should gas shortages continue. Alvera said those likely would not last long, though he said industrial end-users may be asked to voluntarily cut back as a stop-gap measure. Data from Gas Infrastructure show European gas storage levels at 66% capacity, below the 85% found in the 10-year average for this time of year.

John Kemp reports that European electricity prices are climbing again as traders anticipate persistent tightness throughout the winter, which will require increased generation from the oldest, least-efficient, and highest emission units to meet combined load across the continent’s interconnected grid.

How is that energy transition going for you?

The Energy Report: Omicron Away

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The Energy Report: Omicron Away

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Ritu Singh
Ritu Singh Dec 06, 2021 8:45PM ET
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Great Study.
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