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The Energy Report: Zero Hour

By Phil FlynnCommoditiesMay 16, 2022 11:28AM ET
The Energy Report: Zero Hour
By Phil Flynn   |  May 16, 2022 11:28AM ET
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If China does reopen its economy from its lockdown, does the world have enough stock to stop a major oil price spike? Probably not.

Oil prices on Sunday night started strong as all futures markets were in a Sea of Green. The market was buoyed by reports that China would be reopening Shaghi from covid lockdowns as early as today, raising demand expectations for oil that frankly will be hard to meet. Yet, after hitting tough resistance on oil technically and as more reports swirled about stating how bad the China economy was hit with the shutdowns, we pulled back to refill some of the moves that we made on Friday. It did not help to see data that Russian oil output rose last month.

Reuters reported that Russian oil and gas condensate average output has increased by around 1.7% month on month to 1.4 million tonnes per day (10.25 million barrels per day) in the first half of May, Interfax news agency reported on Monday. It also said Russian oil exports, excluding the former Soviet Union via the Transneft network, have declined from April’s average by 4.1% to 608,600 per day (4.46 million barrels per day) for the period.

Germany is vowing to stop buying Russian oil. Bloomberg News reported that the German Foreign Minister Annalena Baerbock said she expects the European Union to impose sanctions on Russian oil within the next few days. EU members have discussed the details of a sixth sanctions package for more than two weeks, with Hungary holding up progress as it seeks guarantees over its energy supplies:

 “We still have to clarify a few things. That won’t happen here today, but I’m very confident that we’ll conclude in the coming days.”

Still, we think that today’s break should be bought even as the globe frets about recession in Europe and, to a lesser extent, in the United States.

Oil products are tight as we have restrained reefing capacity and the lack of heavy crude for diesel. Fright Waves reported that the East Coast of the U.S. could face a worsening diesel shortage this summer, John Catsimatidis, CEO of United Refining Co., said in an interview with Bloomberg. According to the company’s website, United produces some 70,000 barrels of petroleum products each day and sells gasoline throughout western New York and northwestern Pennsylvania. He said:

 “I wouldn’t be surprised to see diesel being rationed on the East Coast this summer. Right now, inventories are low, and we may see a shortage in coming months.” Carriers and owner-operators — especially those with already-slim margins — are struggling to keep up with rising diesel prices. Catsimatidis said he doesn’t expect the 350 stations United Refining operates to be low on gasoline; it will just be very expensive. 

“Drivers will pay the highest gasoline prices ever paid for Memorial Day.”

According to the Department of Energy, national diesel inventories are the lowest in 17 years, and East Coast stockpiles haven’t been this low since 1990. 

Natural gas is off highs, but the fundamental outlook is still very bullish. We have kept a bullish outlook, and prices in the U.S. and globally could continue with some massive potential moves. EBW Analytics reports that the June natural gas contract plunged $1.61/MMBtu from Friday to early Tuesday before recovering more than three-quarters of losses by Friday’s close. On a closing basis, Wednesday-Friday all closed within 10¢/MMBtu as the market attempts to consolidate recent gains. Over the next 7-10 days, relenting bullish forecast shifts and weak. LNG feedgas demand may allow for renewed tests of support. As a hot Texas and soft production fail to make sufficient inroads in the storage deficit, explosive upside remains possible into summer. 

Zero Hedge reports that a top commodity research firm in Norway warns a “perfect storm” is brewing as European energy security worsens following Russia’s invasion of Ukraine, which could result in the tripling of natural gas prices. There simply is not enough LNG around to meet demand. In the short term, this will make for a hard winter in Europe. Kaushal Ramesh, a senior analyst for Gas and LNG at Rystad Energy, wrote:

“For producers, it suggests the next LNG boom is here, but it will arrive too late to meet the sharp spike in demand. The stage is set for a sustained supply deficit, high prices, extreme volatility, bullish markets, and heightened LNG geopolitics. [The EU has an] ambitious target to reduce dependence on Russian gas by 66% within this year – an aim that will clash with the EU’s goal of replenishing gas storage to 80% of capacity by November 1.”

High oil prices propelled Saudi Aramco (TADAWUL:2222) to record profits. The Wall Street Journal reported that Saudi Arabian Oil Co., known as Aramco, said its quarterly profit swelled to $39.5 billion in the quarter, up 80%, a period during which Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, continued to rebuff U.S. requests to pump more oil to help tame surging crude prices, instead of sticking by an agreement with Russia to only marginally increase output. The agreement with Russia allows for production increases of around 400,000 barrels a day each month, but it has done little to stem the rise in oil prices, and the Saudis have pumped less than their share, according to the International Energy Agency.

The Energy Report: Zero Hour

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The Energy Report: Zero Hour

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