The gap between global oil supply and global oil demand is causing a spike in the price of oil and is becoming a cumbersome and heavy load on the global economy and the poor and middle class. Not only did OPEC yesterday report that the world is facing a global oil supply deficit of 3.3 million barrels a day over the next three months, but the International Energy Agency (IEA) is reporting that global oil inventories have hit a 13-month low as they have plummeted by a whopping 76.3 million barrels. Interestingly enough, the 3.3 million barrels a day is in the middle of my estimate of a supply gap of 2 to 4 million barrels a day that we made months ago. It is also the estimate of the amount of oil the US producer would be producing if the country had not embarked on Biden’s energy policies.
Even despite this administration slandering the US oil and gas industry by calling them war profiteers and price gougers along with a slew of regulations and lawsuits and encouraging outside groups to sue US oil and gas companies, it still managed to raise production to near record highs. US consumers need to ask what should have been.
The Energy Information Administration (EIA) in their Short-Term Energy Outlook said that,
“US crude production would rise the U.S., by 870,000 bpd in 2023 to a record 12.78 million barrels, up from last month’s forecast of an 850,000-bpd increase. In 2024, output is expected to rise by 380,000 bpd to 13.16 million bpd."
The EIA also reported that US gas producers’ dry gas production will rise to 102.69 billion cubic feet per day (bcfd) in 2023 and 104.93 bcfd in 2024 from a record 98.13 bcfd in 2022 in an attempt to meet record demand. That was based in part on advances in technology innovation by the industry that Biden slandered and vowed to eventually put off business. The US oil and gas industry still managed to raise production in the face of the most anti-US and oil gas president in the history of the United States.
That still is not enough to fill the global oil supply gap that has been made even more cumbersome by OPEC and Russia's exertion of their combined 1.7 million barrel-a-day production cut. OPEC and Russia would be less inclined to cut production in a market that was undersupplied if they knew that US producers could fill that void and take away their market share. The market share that might have been if Biden worked with US oil and gas companies as opposed to refusing to meet with them then we would be better able to respond. Biden refused to give US oil and gas companies a seat at the table when crafting his energy policies so the supply gap he largely owns.
Biden also owns the fact that he misused the SPR and had a hostile relationship with Saudi Arabia which is a major reason why Saudi Arabia is leading this production cut. The International Energy Agency, (IEA) which has stated that the world needs to stop investing in fossil fuels, now seems very nervous about the tightness of supply. While they warn that the “Saudi oil cuts would threaten a surge in price volatility” they fail to acknowledge that the IEA policies have been directed at discouraging investment in oil and gas. They also should acknowledge that their oil demand expectation and predictions of peak oil demand have further hurt oil and gas investment.
In fact, it’s crazy that the IEA is basing its hopes that oil demand growth will remain steady at 1 million barrels a day in hopes that China’s economic recovery runs out of steam and that their vehicle electrification starts to take hold. Isn’t that a hoot? So I guess that means to go short gasoline and go long coal. The IEA is also hoping that OPEC and Russia unwind their production cuts in 2024 so that a global deficit will turn into a small surplus. Of course, hope is not a strategy.
Now the IEA also is saying that the OPEC plus cuts are being tempered by surging Iranian production, so I guess that Biden’s mainly ignoring Iranian sanctions might be helping keep the supply gap below 5 million barrels a day. Also, we could point out that Russia’s oil revenues are surging.
We can cite more statistics from all of the reports from OPEC and the IEA monthly as well as the EIA Short-Term Energy outlook. The fact is they are all very bullish and seem to point to the fact that global leaders failed to prepare for the coming supply deficit even as we could see it coming even before the Ukraine war.
You can just blame OPEC because OPEC was backed into a corner by the Biden administration and the International Energy Agency. As far back as April OPEC said that the International Energy Agency should be “very careful” about undermining industry investments.” OPEC led by Saudi Arabia was frustrated not only with Biden’s release of oil reserves but with blackmailing Saudi Arabia into raising oil production months before the Ukraine war started. The IEA also criticized OPECX for its policies.
In April the OPEC Secretary General Haitham al-Ghais said finger-pointing and misrepresenting the actions of OPEC and OPEC+ was “counterproductive”. He said that OPEC nations were not targeting oil prices, but instead focusing on market fundamentals. His point was that the US and Europe interfering in the market, it damaged investment in an industry that is projected to see over a trillion dollar shortfall to meet future oil demand.
That may be why oil prices are shrugging off what some were calling a bearish weekly American Petroleum Institute (API) report. The API reported that US crude supply broke the trend of plunging supply by reporting a 1.174 million barrel increase. Yet one disturbing trend was not broken and that was another large 2.417 million barrel crude draw in the CME delivery point. And while we did see a 2.592 million barrels increase in distillate supply, it is not easing concern about supply shortages as global inventories are well below the 10-year average. Gasoline also saw an increase of 4.21 million barrels as gasoline demand waned after the Labor Day Holiday. Yet hopes that gasoline prices will feel the full impact of the price break from the switch back to winter blends is waning as the gasoline crack spread is back on the rise.
The hope of many that a recession or bank failures would have peaked oil and gasoline just is not happening. Prediction of peak demand and and a slowdown in China while ignoring data that showed that demand for oil in China was not faltering or that the US was not in a recession and the lack of liquidity because of banking concerns, allowed the market and analysts to ignore the coming supply deficit. They can’t ignore it anymore. It’s here.
It is also a great achievement that the US is now the largest Liquefied Natural Gas (LNG) exporter in the world. The US is providing the words cleanest fossil fuel to many places including Europe, that is now reclassifying natural gas in a war against climate change. Maybe they are starting to rely on the reason why the US was able to reduce their greenhouse gas emissions by more than any country in the industrialized world because we replaced coal with natural gas. No, it was not because of wind and solar. So I am still perplexed by the fact that they want to ban natural gas buildings, pipelines, and natural gas appliances in favor of electricity which will force the US to use more coal.
The EIA reported that the United States exported more liquefied natural gas (LNG) than any other country in the first half of 2023 (1H23), according to data from CEDIGAZ. U.S. LNG exports averaged 11.6 billion cubic feet per day (Bcf/d) during this period, 4% (0.5 Bcf/d) more than in 1H22, according to data from the U.S. Department of Energy’s LNG Reports. Australia exported the world’s second-largest volume of LNG in 1H23, averaging 10.6 Bcf/d, followed by Qatar at 10.4 Bcf/d. The increase in U.S. LNG exports mainly resulted from Freeport LNG’s return to service as global LNG demand remained strong with continuing growth, particularly in Europe.
Look for the natural gas rally to continue as we are looking for another bullish surprise in this week’s inventory injection because of record-breaking heat in Texas.