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The Energy Report: Soft Cuts

Published 06/07/2024, 09:37 AM

Petroleum prices rallied yesterday but are dropping today ahead of the all-important monthly jobs report that is expected to show that the US added 190.000 jobs which may settle the question as to whether the Federal Reserve will actually cut interest rates and when they might do it.

Oil prices, which have suffered 3 weeks of losses on concerns about a softening global economy will get a boost from the fact that the Fed is about to embark upon a rate-cutting campaign.

Oil prices and commodities surged as the European Central Bank (ECB) cut rates as expected rates now the pressure is on the Fed to do follow the rate cut leader.

The ECB Cut the deposit rate to 3.75% from a record 4.0% but failed to signal whether that was on cut and done or just the beginning.  This morning’s eurozone GDP came out as expected so that’s not going to give us a hint one way or the other. The Eurozone GDP Revised QoQ Actual 0.3% (Forecast 0.3%, Previous 0.3%) Eurozone GDP Revised YoY Actual 0.4% (Forecast 0.4%, Previous 0.4%)

Part of the rebound in the price of oil and petroleum was the fact that the market started to realize that they misinterpreted the OPEC plus plan to tapper back on production cuts. Both Russia and Saudi Arabia wanted to point out that the market had overreacted to their announcement.

The reason why they thought they could cut back maybe as much as 180,000 barrels a day is because they expect the demand for oil to increase by anywhere from 1.5 million barrels a day to 2,000,000 barrels a day.

They also wanted to make it clear that if demand growth didn’t happen then the taper would not happen.

The cuts that they are going to consider tapering what’s that 2.2 million barrel a day voluntary cuts from 8 different OPEC members.

OPEC Plus signaled that perhaps in October of 2024 to September of 2025 ahead of the winter demand period when they expect to see a supply deficit that some of these countries that we’re volunteering these cuts might start to incrementally add a few barrels back to the market.

The amount they’re talking about maxes out at 180,000 barrels a day. demand growth increases within their range later in the year the market is going to really feel these extra barrels at all.

In 2025 at the end of the year, they were talking about bringing back about 200,000 barrels a day each month from January to September of 2025

Energy Intelligence reported that Saudi Prince Abdulaziz that  “ Given the uncertainty around demand growth, the producers said the scheduled return of these volumes could be paused depending on market conditions. “We’re waiting for interest rates to come down. [We want to see] better trajectory when it comes to economic growth, global growth, not pockets of growth here and there. [We want to see] more certainty on the overall economic trajectory. That will probably cause demand to increase with a clear path,” said Prince Abdulaziz.

Zerohedge reported that  Russia is also on board with trying to reassure the markets that they will not see a flood of oil.

“Our reduction against April continued in accordance with our OPEC+ agreements,” Novak told reporters on the sidelines of the St. Petersburg International Economic Forum, as quoted by Russian news agency TASS.

Asked about exact numbers for the May oil production, Novak said that the scale of the output cut would become clear in about a week.

When the OPEC+ members announced in early March their intentions to extend the cuts into the second quarter, Russia changed its production/export cut plan and said that it would reduce supply by 471,000 bpd in the second quarter in the form of cuts to oil production and exports. In April, Russia pledged to reduce production by 350,000 bpd and exports by 121,000 bpd. In May, the 471,000-bpd reduction would be in the form of a 400,000-bpd cut to production and 71,000 bpd cut to exports, and in June the Russian supply cut would be 471,000 bpd entirely from production reductions.

Output cuts were to account for most of the extra Russian supply cut this quarter, and they could be the result of reduced refining capacity with maintenance in Q2 and refinery rates estimated to have slumped due to Ukrainian drone attacks on Russian refineries.

I do not want to get corny but it’s notable that US Ethanol exports surged in April. Karen Braun at K KANNBWK pointed out that U.S. ethanol exports in April at 811M liters (214M gallons) were the second highest for any month on record and up 51% from the 3yr April avg. Canada accounted for 29%, United Kingdom 16% and India 9%. Huge monthly record for US ethanol exports to the UK.

You had better get ready for the heat wave that’s going to impact large parts of America not only could it affect crops but it’s going to add to the demand for electricity as people try to keep cool.

Fox Weather reported that a Triple-digit heat wave continues to scorch West as Las Vegas forecasted to climb over 110 degrees. The dangerous heat has prompted the issuance of Excessive Heat Warnings from California to Arizona. Numerous record-high temperatures could fall throughout the region as temperatures rise as high as 25 degrees above average.

Natural gas prices are getting support from the heat even after the Energy Information Administration reported a higher-than-expected injection. EIA said that working gas in storage was 2,893 Bcf as of Friday, May 31, 2024, according to EIA estimates. This represents a net increase of 98 Bcf from the previous week. Stocks were 373 Bcf higher than last year at this time and 581 Bcf above the five-year average of 2,312 Bcf. At 2,893 Bcf, total working gas is above the five-year historical range.

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