Oil prices are selling off on weakening economic fears as the US sells out to China, agreeing to new emission standards that will hurt US oil and gas producers to raise prices and give China a distinct economic advantage, states Phil Flynn of PRICE Futures Group.

China, for its part, seems to be controlling energy demand with Covid-19 lockdown fears. Reports say, “China’s top leadership urges the country just stick to a strict zero Covid-19 policy. The China Covid-19 lockdown measures have slowed global oil demand just enough to keep prices from spiraling out of control. In recent weeks, there has been talk about China reopening oil imports that did surge recently, leading to speculation that a reopening could be happening. Yet comments this morning seemed to suggest that may not happen as quickly as some people had hoped. Still, when it comes to China, we have to watch what they do not what they say but the market obviously is going to take into consideration the potential impact of the China reopening.

China and India are two countries that are not at the COP 27 climate conference yet that didn’t stop the US from making an agreement with the European Union to make our country more dependent on foreign sources of oil and gas. Reuters reports that “The United States and the European Union will unveil an agreement targeting methane emissions within the fossil fuel industry. The agreement is set to be released this week, although it has been seen by Reuters, and includes provisions not just to target the fossil fuel industry’s emissions with domestic interventions but with international ones as well. The policies, according to the document, will include mandates to stop routine venting and flaring of Nat gas, force companies to fix infrastructure leaks where they exist, and could include provisions that require companies to monitor and report their methane emissions.” We commit to working towards the creation of an international market for fossil energy that minimizes flaring, methane, and CO2 emissions across the value chain to the fullest extent practicable, as we also work to phase down fossil fuel consumption,” the draft document reads in part.

Well, that sounds nice on the surface. The reality is that these regulations could put an end to fracking in the United States. Most of the fracking operations in the United States would have a hard time implementing these types of rules which could severely reduce US oil and gas production. This is one of the reasons why we’re not seeing a lot of money going back into the fracking space. One loyal reader of the Energy Report, Jo said, “Stop flaring! Don’t allow pipelines! Produce more, but no drilling! The NE is going to be very very cold this winter!” The point being is that these regulations could put producers in a catch-22. You can’t build pipelines so you must flare if you can’t flare then you can’t produce. That means you’re not going to have as much supply which means you’re going to be more dependent on other countries.

It also means that countries like China and India will continue to pollute and take advantage of the US's short-sighted regulatory environment. Not that we are against finding ways to reduce methane emissions but one of the best ways to do that is to build more pipelines. That way we can put the gas where it’s needed and export it to the world. We could reduce carbon emissions by replacing coal and dirtier fuels, yet these regulations will be a big step back for US oil and natural gas production. It will mean dirtier fuels. No matter how you slice it, you can’t replace fossil fuels with alternative energy anytime soon.

In the meantime, we are exporting plenty of oil and diesel to Europe and Asia where oil exports were down from last week’s record, but total petroleum exports surged to a whopping 9.692 million barrels a day. Someone wants that oil. Here at home, the EIA said that US inventories of distillate fuels will lead to high prices through early 2023. Domestic distillate fuel supplies finished the month of October at their lowest levels in any October since 1951.

The EIA reported good demand but oil imports to the US led to a build. The EIA reported that US crude oil refinery inputs averaged 16.1 million barrels per day during the week ending 247,000 barrels per day more than the previous week’s average. Refineries operated at 92.1% of their operable capacity last week. Gasoline production increased last week, averaging 9.8 million barrels per day. Distillate fuel production increased last week, averaging 5.2 million barrels per day. US crude oil imports averaged 6.5 million barrels per day last week, which increased by 249 thousand barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 6.2 million barrels per day, 1.6% more than the same four-week period last year.

Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 489,000 barrels per day, and distillate fuel imports averaged 328,000 barrels per day. US commercial crude oil inventories increased by 3.9 million barrels from the previous week. At 440.8 million barrels, US crude oil inventories are about 3% below the five-year average for this time of year. Total motor gasoline inventories decreased by 0.9 million barrels from last week and are about 6% below the average for this time of year. Both Finished gasoline and blending components inventories decreased last week. Distillate fuel inventories decreased by 0.5 million barrels last week and are about 17% below the five-year average for this time of year.

The EIA had a special report on natural gas. They said, “In our November Short-Term Energy Outlook (STEO), we forecast that natural gas spot prices at the US benchmark Henry Hub will average $6.09 per million British thermal units (MMBtu) this winter (November 2022-March 2023), the highest real price since winter 2009-10. Our forecast reflects natural gas storage levels that are 4% below average heading into winter withdrawal season and more demand for liquefied natural gas (LNG) as the Freeport LNG facility comes back online. After the winter, we expect the Henry Hub price to decline in 2023 as production growth outpaces both domestic consumption and LNG exports.

Henry Hub natural gas spot prices reached a peak of $8.80/MMBtu in August. Prices declined to an average of $5.66/MMBtu in October following a period of strong dry natural gas production and several consecutive weeks of relatively large injections into natural gas storage. Throughout September and October, high volumes of natural gas injections into underground storage reduced the storage deficit to the five-year (2017-21) average from 11% at the end of August to 4% as of October 28.

Despite lower Henry Hub spot prices since August, we expect natural gas prices to rise this winter as a result of seasonal demand for natural gas in space heating, which typically peaks in January and February. We expect that higher demand for LNG exports-particularly in the Northern Hemisphere-will also increase natural gas prices. We expect demand for natural gas at LNG export facilities to increase when the Freeport LNG terminal in Texas resumes partial operations in November after it paused operations in June following a fire.

US dry natural gas production has been increasing throughout 2022 and has averaged more than 98 billion cubic feet per day (Bcf/d) every month since June. We expect dry natural gas production to continue to grow, averaging 99.4 Bcf/d this winter and 99.7 Bcf/d in 2023. We forecast natural gas prices at the Henry Hub will begin to decline in the spring of 2023 as production growth continues and winter demand for heating subsidies. For 2023, we forecast the annual Henry Hub price to average $5.46/MMBtu for the year.

Learn more about Phil Flynn by visiting Price Futures Group.