Oil prices hit the highest level since 2014 as it becomes apparent that you can’t separate politics and oil, states Phil Flynn of the PRICE Futures Group.
Oil prices hit the highest level since 2014 as it becomes apparent that you can’t separate politics and oil. Whether it be the leadership that went headlong into the energy transition that helped create an energy crisis in Europe, or that Biden’s cancelation of the Keystone Pipeline would have no impact on gasoline prices, they both fail to recognize the intricacies that move the oil market and in turn gasoline prices. OPEC also is reporting that demand is better than expected, keeping its world oil demand growth forecast at 4.2 million barrels a day but total consumption at 100.8 million barrels a day. A number that will be hard to feed with the anti-fossil fuel political agenda.
The demonization of fossil fuel investment not only impacts prices in the short run but in the long term as well. Ray Dalio, the founder of hedge fund Bridgewater Associates, agrees with this sentiment and according to Bloomberg News warned against transitioning away from fossil fuels too rapidly and said that cutting off the supply of finance to the industry would have a destabilizing effect as inflation soars. “Thank God for the oil producers,” because they are providing reliable supply, Dalio said Monday on a panel at the Abu Dhabi Sustainability Week summit.
The global undersupply in oil has come in large part by the green energy movement. The Paris Climate accords ambitious reduction of greenhouse gas emissions that really had a small impact on the planet is backfiring as the world is a short of supply and turning towards dirtier fuels. They failed to consider that wind and solar are not ready for prime time and by trying to adhere to the Paris climate accord left their economies and their national security suspect. Biden also put America back into that accord which has helped create a toxic environment for US oil and gas investment, even though it was clear that Europe was creating a major energy crisis trying to adhere to the deal despite the risks totally outweighing the benefits. Counties in Europe and Asia have turned to dirtier fuels as wind and solar fails to meet demand and Russia restricts natural gas supply.
Just today for example, it was reported by Reuters that, “China will tell coal miners to maintain normal output during the Lunar New Year holiday after a production boost that began in late 2021 lifted thermal coal stocks to record levels," a state planning official said on Tuesday. The government was also pushing to expedite the approval and construction of cross-region electricity grids to optimize the power system after a supply crunch last year led to widespread power rationing and record coal prices.
Oil prices have other geopolitical issues that are a concern. Prices got a boost last week on reports from the Biden administration that Russia is preparing to create a “false flag” as a pretext for invading Ukraine. Russia for their part says that the West is to blame for expanding its influence around their country in violation of longstanding agreements that go back to the fall of the Soviet Union. Tensions are running high and oil markets are worried as Russia’s daily average crude and condensate production is 10.52 million b/d in 2021, as OPEC+ increased quotas. The EIA reports that Russia was the second-largest producer of dry natural gas in 2020 (second to the United States), producing an estimated 22.5 trillion cubic feet. Europe is Russia’s main market for its oil and natural gas exports, and by extension, Europe is its main source of revenues. Yet on the flip side, Europe is dependent on them as well.
The US says they have Europe’s back and promises to send as much LNG as it can, but bad decisions made by Europe’s political leaders mean that the continent is vulnerable to bad energy policy.
Crude oil also got a boost as the Iranian-backed Houthi Rebels not only fired missiles, but this time hit something. The United Arab Emirates will ask the US to put Yemen’s Iranian-backed Houthis back on its list of terrorist organizations after a drone attack on the Emirati capital killed three people, a person familiar with government thinking said Monday. The UAE will work on building pressure through the UN Security Council over the strike and the capture of an Emirati vessel off the coast of Yemen earlier this month. Demand is also showing that the Thanksgiving Day price massacre due to the omicron variant was overdone. OPEC said that the impact on oil demand was weaker than expected in late 2021. Variant’s impact is projected to be mild, but uncertainties remain over new variants and renewed mobility restrictions. Demand for oil was stronger than expected in the final three months of 2021.
Gasoline prices are still averaging $3.31 a gallon, and that is a number that will go higher in the coming days. Rising demand failed to be met as oil producers cut back as they fear more regulations from the Biden administration as well as fear that more pipelines may be blocked. We predicted that gasoline prices would soar if Biden was elected. The fact-checkers scoffed. The fact-checkers and those that checked their so-called facts were also wrong. Biden’s release from the strategic petroleum reserve did little to cool off gasoline prices and really the only thing that kept gasoline prices down was the omicron scare. Now we’re going to see that Biden’s attempt to cool off prices will backfire. In fact, it may make gasoline prices go up even higher than if he allowed the free market to do what it does best. Biden continues to look to OPEC to be his savior. They failed to embrace the US energy industry and their Energy Department is so focused on green energy that they fail to meet the realities of today. That is a shame, because it’s hurting average Americans who are feeling the pain at the pump and seeing their paycheck more and more be sopped up into their gas tanks, higher food and clothing costs, transportation costs, and car cost.
Winter temperatures should lead to one of the biggest drawdowns we’ve seen in the natural gas inventories in a while. This week the EIA should see natural gas inventories dropped by 250 BCFs. Global demand for natural gas is strong though a warm front in Europe is easing some concerns of tightness. Overall, the global market remains tight.
As prices soar, we continue to recommend to users of gasoline oil and natural gas should remain hedged. As airline travel reopens, we expect supplies of diesel to tighten as well with global demand for oil pushing near record highs. The market is going to be very tight for some time to come. The biggest concern of course is that as prices go up; how the Federal Reserve will react to the inflation pressures and whether this energy price spike is going to drive us into recession.
Learn more about Phil Flynn by visiting Price Futures Group.