You all know that old saying that ‘the chickens come home to roost’ is sadly taking part in the global oil market and the scariest thing is there is not a lot of bearish news anywhere you look. Just a lot of chickens or roosters – whatever. The seasonal gas price rise along with declining global inventory and reduced refining capacity has AAA calling for gas prices to hit $4.00 a gallon this summer, the highest level since 2022.
This comes as Russia showed its commitment to OPEC production cuts as Vladimir Putin laid down the gauntlet to the Russian oil producers decreeing that they have to reduce oil output to 9 million barrels a day by the end of June. Knowing Putin, they better comply if they know what’s good for them. OPEC also announced that they would continue with their production levels and will confirm that at their April 3rd meeting.
This comes with reports about falling US oil output and conflicting predictions on whether the heavy-handed regulatory environment is going to cause a drop in future US oil production. Regardless, the Biden Team must be starting to worry as they are running out of options to cool off red-hot pump prices. Instead of dealing with reality, they doubled down on their job-killing and environmental electric car push based on political ideology and not on science.
So, Biden’s plan to refill the strategic reserve at $67.00 a barrel to $70.00 a barrel is starting to unwind and for strictly political purposes Biden may have to tap the reserve again to try to save his presidency. Under Biden, Iranian oil production has hit record highs and he’s turning a blind eye to Venezuelan oil sanctions that he lifted in return for what was supposed to be a free and fair election that never happened. Still this morning Bloomberg reports that India may cut purchases of Venezuelan oil ahead of the Biden waiver that expires on April 18th and is probably good news for Russia.
While the US energy industry has squeezed more blood out of every oil rig, there are more questions about whether the techniques that the producers have used in the shale patch are going to start giving us diminishing returns. Goldman Sachs came out with a report suggesting that U.S. oil production had declined by 400,000 barrels a day since December to 12.6 million barrels a day. This number doesn’t agree with the headline number from the Energy Information Administration (EIA) which they have already started to revise downward.
Yet Macquarie Group Ltd. is once again betting on the ingenuity of the US oil and gas industry to overcome obstacles. Macquarie is predicting that US energy production will hit 14.5 million barrels a day as falling costs and improved drilling efficiency overshadow subdued growth plans from publicly listed companies. That’s higher than EIA’s call for 13.2 million barrels a day. Macquarie stood out among analysts last year with its projection of increased US shale production and ultimately was proved correct. Its latest forecast comes as shale oil explorers are vowing to rein in production growth for a fourth straight year and consolidation in the industry presents headwinds to further growth. The US government expects production to edge up to 13.2 million barrels a day this year.
The devastating and heartbreaking news of the cargo ship hitting the Francis Scott key bridge in the port of Baltimore could have ramifications for a lot of commodities today. The Port of Baltimore is the second-largest port in the United States for coal exports, shipping about one-fifth of the country’s coal exports. In 2023, the port’s top export destinations were Australia, India, Belgium, Japan, and the Netherlands. Our prayers are for all of those involved in this horrific event.
What’s so much bullish news the market may need to take a breath. Inventories today in the Energy Information Administration aren’t expected to be overly bullish. We are looking for slight draws across the board. Some people think that the report has to make up for under-reporting drawdowns last week. We shall see but guesses are all over the board. The thing to remember is that even if we get builds in supply, we’re still below and behind the 8 ball heading into the summer driving season.
The attacks on Russian refineries caused the diesel crack to outperform gasoline but it’s going to be a cat-and-mouse game as refiners have to decide what type of product they’re going to need to meet demand. In the meantime, the possibility of a gasoline price spike continuing is very very high and while AAA is looking for $4.00 this summer, it could go higher if we see any supply disruptions around the globe. Hedge funds are starting to embrace the long side of the market after fighting this market every step of the way. We’re afraid that the prices are going to have some making up to do as it seemed to ignore bullish fundamentals in the past and now we will have to pay the price in the future for that lack of vision.
Yet now according to John Kemp, the oil market has seen a frenzy of hedge fund buying. He wrote that, “LONDON, March 25 (Reuters) – Investors have purchased oil at the fastest rate for more than four years, amid optimism that Saudi Arabia and its OPEC⁺ allies will continue to restrict production while an improving economic outlook boosts consumption.
Ukraine’s drone attacks on oil refineries and export terminals in Russia, which threaten to disrupt production and exports of both crude and fuels, have turbocharged the shift in sentiment to more bullishness. Over the seven days ending on March 19, hedge funds and other money managers purchased the equivalent of 140 million barrels in the six most important futures and options contracts linked to petroleum prices.
The buying was the fastest since December 2019, and among the ten fastest weeks since records began in 2013, according to position reports filed with exchanges and regulators.
Another bad day for natural gas prices and US producers. The Freeport LNG export terminal being down for extended maintenance and other maintenance issues is going to increase the glut of natural gas. We still want to short on the front end. We expect to see more production cutbacks in the natural gas space. Do you think that there’s any chance that the Biden administration will provide a bailout for the US natural gas industry. I doubt it.