If at first you don’t succeed, why not try price caps, suggests Phil Flynn of PRICE Futures Group.

The G7 is talking about a ridiculous plan to try to cap the price of Russian oil because they’ve sadly admitted that they can’t stop buying Russian oil without destroying the global economy. So now the G7 is talking about a plan to cap the price of Russian oil not realizing that anytime you try to impose a price cap, it will eventually lead to shortages. Russia, for their part, had their first default on a foreign loan since Stalin was leading the country. Russia says, I want to pay, I’m willing to pay, I’m begging the pay but they won’t take the money because of sanctions.

So in other words, it’s not a default.

This price cap idea coming out of the G7. It’s one of the most ridiculous proposals we’ve heard out of an organization that has come out with some pretty ridiculous proposals in the past. First of all, trying to find the price that is fair for Russian oil where Russia will continue to produce it and people will continue to buy it. Russia for their part may decide that they don’t like the price the EU sets and hang onto their oil. Besides, their revenue for oil in recent months far exceeds what they were taking in before they invaded Ukraine so why not. Russia may also retaliate and cut off gas supplies to the EU and even though they’ve built up their coffers of natural gas going into next winter, the reality is they do not have enough supply to get through if Russia plays the gas card. It seems like the G7 may not do this after all but stay tuned because they are going to try something to cut into Russian oil and gas revenues.

Biden continues to double down on green energies and told leaders at the G7 that investing in clean energy is the way to solve high gasoline prices. Thus far investing in clean energy has caused high gasoline prices and unrealistic expectations about how green energy can replace fossil fuels and other energy sources like nuclear power. It’s all been based in a political fantasyland where reality doesn’t exist and decisions have been based on fear of climate change even though the direst predictions about climate change have failed to come true.

The New York Times is reporting that Biden’s top aides are weighing whether to ban new oil and gas drilling off America’s coasts, a move that would elate climate activists but could leave the administration vulnerable to Republican accusations that it is exacerbating an energy crunch as gas prices soar. By law, the Department of Interior is required to release a plan for new oil and gas leases in federal waters every five years. Deb Haaland, the Interior secretary, has promised Congress a draft of the Biden plan will be available by June 30.

The New York Times says, “Biden’s inner circle, including chief of staff Ron Klain and longtime adviser Steve Ricchetti, is closely involved in the discussion about whether and where to allow drilling, said the officials, who spoke on the condition of anonymity because they were not authorized to discuss the deliberations. “The Biden Administration is in a difficult place,” said Sara Rollet Gosman, a professor of environment and energy law at the University of Arkansas. “If the Department of the Interior decides to eliminate offshore lease sales or to offer only a few sales, it does the right thing for the climate. But it also gives ammunition to fossil fuel companies to argue that President Biden doesn’t care about high gas prices.” Several people familiar with the administration’s decision-making said it is likely to block new drilling in the Atlantic and Pacific oceans in the face of widespread bipartisan opposition from members of Congress and leaders from coastal states. The eastern Gulf of Mexico has been closed to drilling since 1995.

Any actions by the G7 to further restrict oil and gas development by the Biden administration will be bullish for oil and gas prices. We think that oil and gasoline prices will soon reach a new all-time high because it seems the odds of a deep recession are fading very quickly. According to GasBuddy, we saw a big jump in gasoline demand last week which would suggest that consumers are adjusting to the increase in prices. We are also seeing reports from AAA that the fourth of July holiday will set records even though that record is shy of what it would have been had we not seen these record-high prices. There is nothing like pent-up demand to drive gasoline prices after the shutdown of Covid.

Javier Blass at Bloomberg points out that the number of passengers traveling via airplane in the US hit a post-covid high of 2.45 million on Friday (the seven-day moving average is now trending above 2.3 million, or about 15% below the pre-covid level of June-July 2019). 

Hedgers of oil, gas, and diesel should use this break as an opportunity to lock in prices. The back end of the oil curve continues to act surprisingly weak but we think that will adjust once the front end of the curve starts to stabilize. We are still wondering whether we’re going to get the Energy Information Administration supply report this week. There should be an announcement on that sometime today.

It also might be time to start hedging back into natural gas. EBW Analytics says the rapid post-Freeport descent for natural gas extended further last week as weather forecasts repeatedly shed demand followed by a bearish EIA storage report surprise—repeatedly crushing attempts to put in a firm technical bottom and rebound. The July contract rollover early this week will dictate the immediate-term trajectory for natural gas prices. Over the next seven to ten days, meanwhile, a nearly 4.0 Bcf/d increase in power sector gas burns could ignite a sizeable rebound into early-to-mid July.

Learn more about Phil Flynn by visiting Price Futures Group.