Oil Prices Continued To Surge

Oil prices continued to surge because of interference with market dynamics, states Phil Flynn of PRICE Futures Group.

That is one of the main reasons that OPEC plus surprised the market with a 1.16 million barrels per day production cut according to Russian deputy prime minister Alexander Novak. 

Now some may believe that those comments are directly related to the European Union’s $60 barrel price cap on Russian seaborne oil with an adjustment mechanism to keep the cap at 5%, but really the implications of the interference with market dynamics go much deeper than that. This comment reflects a larger issue of interference with market dynamics and global geopolitics. The real interference with market dynamics started under Biden. First, it was the politically motivated cancellation of the Keystone XL pipeline that had no real justification. That move was an interference in the market because the market assumed that when you are dealing with the US, you are dealing with a country that is based on law. TC Energy, who acted in good faith with the US government, had to record a roughly $1.8 billion impairment charge for Keystone XL in May and formally terminated the project in June.

That move by Biden hurt the credibility of the US and interfered with market dynamics and helped discourage investment in not only US energy projects but also other types of business ventures. That interference with market dynamics also came with an unjustified drilling moratorium on Federal lands and a slowdown in drilling permits. The slowdown in lease sales and forcing ESG has interfered with market dynamics, adding inefficiencies in the system, and adding to inflation.

The other major interference with market dynamics was the misuse and abuse of the nation’s Strategic Petroleum Reserve. Biden made it clear that when he first tapped the SPR to lower gas prices it was supposed to send a message to Saudi Arabia not to mess with Biden. Yet what Biden did unwittingly started an oil war that the Saudis are now winning. Biden should have known that the SPR is not big enough to compete with Saudi Arabia. Saudi Arabia played the long game allowing the US to drain the reserve and then get even with a production cut.

That interference with market dynamics by Biden’s energy policy sadly is starting to show up already in US oil inventories. The American Petroleum Institute (API) reported a stunning supply drop across the board leading with a 4.346-million-barrel drop in crude oil supply and a sharp 1.035-million-barrel drop in the Cushing, Oklahoma hub. Gasoline supply plunged by 3.970 million barrels and distillates also dove by 3.693 million barrels.

Now the globe is heading into a huge supply deficit. That is what I expect and so do the International Energy Agency (IEA) and the Fitch rating service. The reason why we are heading into energy shortages is mainly caused by inference in market dynamics. Short-sided ESG governance programs and force-feeding investment in inefficient green energy sources and unprecedented interference in market dynamics are going to put an extreme burden on the poor and middle class and have added to increased global geopolitical instability. Biden’s discouraging US production has given OPEC more control over our daily life.

Interference with Market Dynamics is going to make it harder for refiners to meet demand. Sheela Tobben of Bloomberg News wrote that “A shock move by OPEC and its allies to cut their mainly high-sulfur crude output is about to thrust Latin America into the spotlight as a possible source of replacements. This could turn into a battleground for US refiners wanting to keep outsiders away from those supplies just as they gear up for North America’s high-demand summer season. American buyers have for years cultivated supply lines across the Americas while large OPEC producers like Saudi Arabia steered the bulk of their oil to Asia—a region that offers the Kingdom the most profitable returns.

Competition could come when Asian refiners have already been actively purchasing heavy crudes from South America and Canada, boosting their prices. But there might not be enough to go around. Canadian barrels have been limited by seasonal maintenance and Latin American supply won’t be enough to counter the announced cuts from the Organization of Petroleum Exporting Countries alliance. That could propel heavy oil prices even higher, spurring fuel inflation.”

And if you don’t think OPEC is serious about cutting production, it’s already been reported that OPEC production fell by 80,000 barrels in March to 29.16 million barrels. Now the reports of Kurdistan and Iraq did lead to some price relief, but today’s Energy Information Administration report should send a signal to the market that supplies are tight and more than likely are going to get much tighter. Oil sold off a bit after reports that oil production and exports have resumed at the Hasira oil field.

The Wall Street Journal reports, “Exxon Mobil Corp. XOM has ended a major campaign to find oil in Brazil, after coming up empty-handed on a multibillion-dollar wager that produced a series of disappointing wells, according to people familiar with the matter. After failing for the third time to find commercially viable amounts of crude in Brazil’s deep waters last year, the Texas oil giant has stopped its current drilling efforts in the offshore acreage it started snapping up with partners for $4 billion in 2017, these people said.”

We have been warning for some time that we were going to come into a situation where demand could very easily outstrip supply. We were warned during the height of the banking crisis sell-off to put on hedges because we believed prices would snap back up. Hedges are still strongly recommended and exposure to oil and gas should be in your portfolio.

Natural gas is still struggling. EBW analytics put it bluntly saying that “A stunning shoulder season weather forecast collapse has flipped a cool-leaning April outlook into forecasts vying for the warmest April in history. The meltdown in weather-driven demand has been parried by non-weather fundamentals including record LNG feed gas demand approaching 14.4 Bcf/d and pipeline constraints driving a temporary downturn in production. Still, a resurgent storage surplus vs. the five-year average may now approach 400 Bcf by late April—reviving oversupply fears and depressing natural gas.

Learn more about Phil Flynn by visiting Price Futures Group.