The Energy Report: Running Hot

Gas prices are moving higher even as refiners run hot to keep up with surging demand despite predictions by some that said gasoline prices have topped out. Triple AAA reports that today’s AAA National Average is $3.851. Reuters is reporting that “US oil refiners, to defy heat, run plants at mid-90% of capacity.

Top U.S. oil refiners will run their plants this quarter at up to 95% of their combined 17.9 million barrel-per-day capacity, according to executives and analysts, defying this summer’s extreme heat to pump out more fuels. The refining industry has been running at above 90% of capacity for more than a year on strong gasoline and diesel demand – and high-profit margins. Oil prices are gaging mixed economic signals. Growing concerns about China’s real estate sector melting down are being offset by a prediction by Goldman Sachs (NYSE:GS) that the Fed will start cutting interest rates by next June.

Crude oil prices are also pricing in more risk premium on warnings to Western-backed shippers that they could be sized by Iran as relations between Biden’s foreign policy team and Iran seem to have heightened tensions. US or UK ships that travel through the Strait of Hormuz are being warned to stay as far away from Iranian territorial waters.

The oil market is also being supported by OPEC and Russia production cuts that are in part a direct result of payback against Biden’s oil war against Saudi Arabia. When Biden tried to use the Strategic Petroleum Reserve as an economic weapon against Saudi Arabia, it further hurt relations with the Kingdom and now the Saudis are getting even.

They have led OPEC with its lollipop production cut to the lowest output since August of 2021 during the pandemic cutbacks. S&P global reported that OPEC’s 13 members pumped 27.34 million b/d, while Russia and eight other allies added 13.06 million b/d, for a total of 40.40 million b/d.

Under Biden and his policy of making Saudi Arabia a pariah state, it has made the Kingdom much less responsive to the United States calls for more oil production and has exploited the Biden SPR release to create an environment where the US and Europe is more dependent on the cartel for supply. Biden’s policy against Saudi Arabia has caused higher gas prices than we would have had under a different policy.

Biden’s price caps and sanctions on Russia are not having the desired effect. The Finical Times reports that, “Inflated shipping costs are enabling Russian companies to earn far more from crude oil sales to India than previously recognized, according to a Financial Times analysis which suggests that the charges may have raised more than $1bn in a single quarter. Russia has, until recently, appeared to comply on this route with Western measures designed to curb its revenues which were introduced after its full-scale invasion of Ukraine last year. Its oil producers have been selling crude to India for below the $60-per-barrel price cap.

But when freight costs are included, they and the traders with whom they work have charged much higher sums. An FT analysis of ships running directly from Russia’s Baltic ports to India suggests that this overcharging, combined with fees earned from shipping the oil on Russia-linked vessels, may have been worth $1.2bn in the three months to July.”

Some also wonder whether Biden failed in diplomacy allowing the Russian-Ukraine war in the first place. Obviously, the Russian War with Ukraine has a major impact on the rising energy process and added to inflation. Milton Friedman will tell you only governments can create inflation because it is always produced by high public spending and a growth in the money supply.

Biden’s hostile regulatory crusade against US oil and gas continues to have an impact on oil and gas investment. Offshore oil and gas investment reported that, “the Baker Hughes’ weekly rig count report shows that the number of offshore rigs in the United States slipped down a notch last week while the total number of rigs operating in the U.S. went down to 654 from 659 units recorded during the week before.

Baker Hughes’ report points out that the total number of active drilling rigs – including onshore and offshore ones – in the United States decreased by 5 units last week, going down to 654, which is down by 109 rigs from last year’s count of 763 with oil rigs sliding down by 76 units, gas rigs slipping down by 37 units, and miscellaneous rigs climbing up by 4 units. When compared to the figures from the week before, oil rigs in the U.S. remained unchanged at 525 units last week while gas rigs slipped down by 5 units to 123, and miscellaneous rigs kept the status quo at 6 units.

Remember, American Petroleum Institute President Mike Sommers blamed the ‘barrage of negative rhetoric’ from the White House for slowing domestic oil and gas production. Biden has waged war against the US oil and gas industry from day one. On day one of his presidency, Joe Biden did a series of executive orders that prioritize climate change across all levels of government and put the U.S. on track to curb planet-warming carbon emissions while discouraging investment in US oil and gas production.

He killed the Keystone Pipeline. The Biden administration put pauses on new leases and permits for federal oil and gas drilling after a judge blocked the administration from using a metric that estimates the societal cost of carbon emissions. Biden pushed a new rule by the Environmental Protection Agency to follow up on a methane rule he announced at a United Nations climate summit in Scotland. The 2021 rule targets emissions from existing oil and gas wells nationwide, rather than focusing only on new wells as previous EPA regulations have done.

Diesel supplies continue to be tight globally. There’s growing concern that if we get a cold winter, we could see diesel prices spiked to all-time highs. Refining margins continue to be strong and there is a concern among global leaders of potential shortfalls this winter.  

Natural gas is going to get a big boost because system wind in Texas eases while the temperatures continue to be hot this week. The injection should be 33 BCFS but next week we could see a much smaller injection. The natural gas market it’s going to look significantly different in the next few weeks than what we thought it was going to look like just a few weeks ago.