The Energy Report: Pot O’ Gold

The directors of First Republic Bank (NYSE:FRC) have the luck of the Irish behind them as they seem to have found a pot o’ gold at the end of the rainbow. The biggest U.S. banks stepped in and deposited $30 billion in First Republic, bringing calm to the U.S. banking sector because it is better to spend money like there’s no tomorrow than to spend tonight like there’s no money!

Wait, I think that’s what caused this mess in the first place. When it comes to spending, most politicians must suffer from a double dose of original sin. The bailout was led by Jamie Diamond, who is like a four-leaf clover: hard to find but lucky to have. So, if the financial markets calm, then the oil market may fly higher than the angels in heaven because if you look at demand, we’re sucking diesel now.

Signs of demand are springing up everywhere you look. The Wall Street Journal reported that surging Chinese oil demand is pushing shipping costs sharply higher. That comes as U.S. exports hit a two-and-a-half-year high for oil, with most of that going to China. The Wall Street Journal points out that Chinese crude oil imports are on track to match or surpass the record level from June 2020, according to the commodity tracking firm Kpler. The journal says that this has been a boon for tanker owners that rent ships out.

Another strong sign of demand is the fact that Saudi Arabia’s oil export also hit a three-month high in January. That is even after they raised their selling price to Asia. Saudi crude oil exports increase by 221,000 barrels a day to a three-month high of 7.66 million barrels per day.

While demand is going up, we’re seeing global production fall. Global oil production fell to a seven-month low, according to Jodi as reported yesterday. U.S. production is at risk as rig counts have been falling in recent weeks. The recent plunge in price is not installing confidence to invest a lot of money to bring more production on right now. Keep an eye on today’s rig counts to get a little bit of an idea of what could come next.

Away with the fairies! OPEC is not panicking over the sudden drop in oil prices, according to Bloomberg and other sources. OPEC is blaming the crude oil decline on speculative money and the derivatives markets rather than economic fundamentals. OPEC expects the global crude market to tighten significantly later in the year, and if the Chinese demand continues the way it is, most people would have to agree with them.

Stall the ball! Biden’s top advisor on oil, Amos Hochstein, says that the U.S. is watching the oil market, but they’re not in a hurry to refill the strategic petroleum reserve. Well, he says that the U.S. is committed to refilling the reserve, but they’re not in a hurry. Probably a smart thing to say if you’re getting ready to buy. Argus Media reported that President Joe Biden’s administration has delayed by roughly a year the return of more than 8mn bl of crude borrowed from the U.S. Strategic Petroleum Reserve (SPR).

The delays were approved as recently as last week, when the U.S. Energy Department revised two “exchange” contracts it negotiated with Shell (LON:RDSa), delaying the return of 3.6mn bl of crude to the SPR until 2025. The administration last year separately revised four other contracts, delaying the return of nearly 4.5mn bl of crude initially planned to be returned to the SPR from 2022-24.

The contract revisions, obtained through the Freedom of Information Act, appear at odds with remarks by U.S. energy secretary Jennifer Granholm, who earlier this year said the administration wants to “accelerate” the return of crude exchanges as part of a three-part strategy to partially refill the SPR. With 371.6mn bl of crude in inventory, the reserve is currently at its lowest level in nearly 40 years.

One part of the administration’s strategy to refill the SPR “is to accelerate some of the exchanges that were announced before to get those back in,” Granholm told reporters at the White House on January the 23rd.

Oil companies and traders borrowed more than 27.4mn bl of crude from the SPR between September 2021 and June 2022, most under a program Biden created in hopes of bringing down gasoline prices. Under the initial contracts, companies were required to return most of the crude by 2024, along with an in-kind “premium” set at 2.3-14.6pc of the volume they borrowed.

But rather than “accelerate” the return of oil to the SPR, the Energy Department has repeatedly sought to delay the return of crude, according to nearly two dozen contracts and contract modifications obtained by Argus under public records requests. The Energy Department failed to respond to repeated requests for clarification on Granholm’s remarks.

Natural gas prices got a little bit of support from yesterday’s weekly natural gas storage report. The EIA showed that working gas in storage was 1.972 BCF as of Friday, March 10th. The historically warm winter has taken supplies from below average to putting supplies 23.7% above the five-year average.