Europe is in a dangerous situation after Russia again reduced natural gas flows to Europe in a not-so-subtle reminder that winter is coming and Russia controls the supply. The move by Russia is sending natural gas prices soaring on both sides of the pond and giving the oil market a boost as Europe struggles to find alternatives to Russian gas. Europe is responding by planning to reduce consumption, but can that work if some countries in the bloc can’t conserve without devastating their economies.
In the meantime, supply fears are trumping recession fears in the energy markets ahead of tomorrow’s Fed announcement and Thursday’s GDP. Oil traders will also look at tonight’s American Petroleum Institute (API) report to confirm signs that gasoline demand may have bounced back significantly after the erratic gasoline demand data that we have seen in recent weeks.
Keep in mind that tonight’s number should include a 5.6-million-barrel release from the SPR. The release will end this fall as the Biden administration is starting to understand that the SPR was not meant to supply the world. Amos Hochstein, Biden’s Special Presidential Coordinator for International Energy Affairs, said:
“We can’t be an oil supplier. It’s a reserve, and so we have to keep that.”
That might be wise considering what Russia is doing to Europe. Let’s pray we don’t get any hurricanes that disrupt US oil production or refining capacity, or we could be in big trouble.
Russia is weaponizing its natural gas supply. Reuters reported that Russian state-owned energy producer Gazprom (OTC:OGZPY) said gas exports through the vital Nord Stream pipeline to Germany would drop to about a fifth of the pipe’s capacity, blaming sanctions-related problems with turbines that have already reduced flows.
Gazprom said that the fresh reduction in the pipeline’s capacity—from 40% to 20%—is expected to take effect Wednesday. Wholesale European gas prices jumped 12% Monday to 179 euros, or about $183, a megawatt-hour. They have more than doubled so far this year and are expected by analysts to keep rising as winter approaches, adding to inflation that is straining economies, governments, and financial markets in the region.
Remember the good old days when OPEC used to cheat on their production quotas? Remember the good old days when the market used to laugh when OPEC said it was going to hold back supply? Well, no one is laughing anymore. Argus Media reported that OPEC compliance levels among members of the OPEC+ producer alliance soared to a record 320% in June, up from 256% in May, according to Argus Media, quoting OPEC delegates. Output came in 2.84 million bpd below its collective June production target, with compliance among core OPEC participants narrowing to 196% from 236% in May and among non-Opec members increasing to 464 from 360%. Argus said its survey for June put total OPEC+ compliance at 297%, with OPEC members and non-OPEC counterparts achieving a respective 213% and 442%.
The question for the market is, can OPEC increase production if they can’t even hit their current quotas? There has been some market chatter that Saudi Arabia has raised their oil exports in recent weeks. We will have to wait for confirmation, but perhaps it’s a sign that the Kingdom is giving into the Biden administration and its upping exports. A sign perhaps they appreciated Biden’s fist bump with Crown Prince bin Salman.
Will any of this matter if we go into a deep recession? What is a recession anyway? The Biden administration doesn’t seem to know, or maybe they don’t want to know. The GDP comes out on Thursday, and it’s possible we’re going to see two successive quarters of negative growth, which, according to your basic economic textbook, is the definition of a recession. This recalls an article written by my old buddy Dan Molinsky at the Wall Street Journal a few years ago when he was in Venezuela covering President Hugo Chavez. It seems that back in 2009, President Chavez had a problem when the economic data started to go in the wrong direction.
Molinsky reported that President Hugo Chávez wasn’t pleased with data released this week that showed the Venezuelan economy tumbling into a recession. So the populist leader came up with a solution: Forget traditional measures of economic growth and find a new, “Socialist-friendly” gauge. “We simply can’t permit that they continue calculating GDP with the old capitalist method,” President Chávez said in a televised speech before members of his Socialist party on Wednesday night. “It’s harmful.”
Biden’s economic advisers like Treasury Secretary Janet Yellen and others seem to agree. If you don’t like what the economic data is telling you, just change the definition, and everything is going to be OK.
Libya’s oil production is coming back after some economic turmoil. Reuters reported it hit 1.1 million barrels per day, quoting oil minister Mohammed Oun from the Tripoli-based Unity government.
Well, the US Strategic Petroleum Reserve was never meant to supply the world with oil. The reality is that the US energy industry continues to be a major positive force in the global economy. The global economy would be in much better shape if we decided to embrace our fossil fuel resources and supply the world with some of the cleanest produced fossil fuels on the face of the earth.
That’s why it is great news that the Energy Information Administration reported that the United States became the world’s largest liquefied natural gas (LNG) exporter during the first half of 2022, according to data from CEDIGAZ. Compared with the second half of 2021, US LNG exports increased by 12% in the first half of 2022, averaging 11.2 billion cubic feet per day (Bcf/d). US LNG exports continued to grow for three reasons—increased LNG export capacity, increased international natural gas and LNG prices, and increased global demand, particularly in Europe.
According to EIA estimates, installed US LNG export capacity has expanded by 1.9 Bcf/d nominal (2.1 Bcf/d peak) since November 2021. The capacity additions included a sixth train at the Sabine Pass LNG, 18 new mid-scale liquefaction trains at the Calcasieu Pass LNG, and increased LNG production capacity at Sabine Pass and Corpus Christi LNG facilities. As of July 2022, we estimate that US LNG liquefaction capacity averaged 11.4 Bcf/d, with a shorter-term peak capacity of 13.9 Bcf/d.
International natural gas and LNG prices hit record highs in the last quarter of 2021 and the first half of 2022. Prices at the Title Transfer Facility (TTF) in the Netherlands have been trading at record highs since October 2021. TTF averaged $30.94 per million British thermal units (MMBtu) during the first half of 2022. LNG spot prices in Asia have also been high, averaging $29.50/MMBtu during the same period.
Since the end of last year, countries in Europe have increasingly imported more LNG to compensate for lower pipeline imports from Russia and to fill historically low natural gas storage inventories. LNG imports in the EU and UK increased by 63% during the first half of 2022 to an average 14.8 Bcf/d.
Most US LNG exports went to the EU and the UK during the first five months of this year, accounting for 71%, or 8.2 Bcf/d, of the total US LNG exports. Similar to 2021, the United States sent the most LNG to the EU and UK during the first half of the year, providing 47% of the 14.8 Bcf/d of Europe’s total LNG imports, followed by Qatar at 15%, Russia at 14%, and four African countries combined at 17%.
In June, the United States exported 11% less LNG than the 11.4 Bcf/d average exports during the first five months of 2022, mainly as a result of an unplanned outage at the Freeport LNG export facility. Freeport LNG is expected to resume partial liquefaction operations in early October 2022.