After six weeks of gains, oil prices are taking a bit of a breather even as there are signs that global demand is strong, states Phil Flynn of PRICE Futures Group.
Saudi Arabia is so confident in the global demand outlook that it took steps of not only extending its lollipop 1.0 million barrel a day production cut but also raising its selling price for its oil to Europe.
Reuters reported that “Saudi Arabia increased the official selling price (OSP) for September Arab light crude to Asia by 30 cents a barrel from August to $3.50 a barrel over the Oman/Dubai average, state oil giant Aramco said in a statement on Saturday. This comes as Saudi Aramco CEO Amin Hassan Ali Nasser is predicting global oil demand will break records, hitting 103-104 million barrels a day in the second half of the year. He is pointing toward the upward potential for air traffic demand that he says is only at 88 percent of pre-covid levels. He also said, “While we expect oil prices to rebound in H2 2023, the Saudi government has extended its one million bpd cut through September, we expect oil revenue to the budget to be lower this year than in 2022. We forecast a full-year budget deficit of -2.3% of GDP. He also says that the Demand from China for oil is much stronger than expected. Still, Ali Nasser says that even with the OPEC cuts, the market is well supplied.
Gas prices, at least, leveled out at a new year high for regular unleaded at $3.829. Still, prices are 29.2 cents a gallon above where they were a month ago when many had predicted that prices had topped out. We did not think so mainly because gasoline inventories were too low.
We also expected a run-up in crude prices as the SPR barrels artificially lowered prices and were coming to an end. We also believe that gasoline demand was being understated. That assumption was proven correct after an upward revision of demand numbers from the Energy Information Administration. Gas Buddy reported that gasoline demand in the US is back above nine million barrels a day based on their credit card swipes last week.
Russia and Ukraine's worries continue to add to the cost of oil. Ukraine's drone attack on a port is increasing the insurance cost for grains and oil coming out of the region. On a day-to-day basis it might not influence the overall price, it’s just another supportive factor that will keep oil prices from falling too far. Bloomberg reports that after the Ukraine Black Sea drone attacks, oil and grain freight rates are set to ‘balloon,’ citing data from intelligence firm Kpler as Russia exports most of its grain and 15-20% of oil via the Black Sea. Russia exports around 500,000-550,000 barrels a day of crude and 450,000 barrels of refined products, mostly fuel and diesel, from Novorossiysk. The port also loads about 250,000 barrels a day of crude from Kazakhstan that gets delivered to the port via pipelines and from there is shipped to Romania for refining, Kpler data show.
Bloomberg reports that the, “nearby the port, the Caspian Pipeline Consortium, or CPC, alone loads tankers with about 1.3 million barrels of crude per day and is the main route for exporting oil from Kazakhstan to Europe. “Some 2.5 million barrels a day of crude and products flows are endangered by the flareup,” Katona said, adding that a potential halt of the CPC would do much more damage to Western interests.
Russia is also the world’s top wheat exporter, and the bulk of its grain is delivered from Novorossiysk and the Kavkaz anchorage in the Kerch Strait. The country is in the midst of a second bumper harvest, making this a crucial time for getting grain to global markets. Kyiv’s decision to take the war to Russia in the Black Sea follows Putin’s July 17 withdrawal from a United Nations-brokered grain deal and a concerted missile campaign against Ukrainian ports since. Ukraine’s grain exports have been severely reduced as a result, while Russia’s were unaffected. The Kremlin’s goals are clear: to make shipping grain from Ukraine uninsurable and destroy the nation’s port infrastructure, both on the Black Sea and along the alternate route that the government in Kyiv has been developing on the Danube River.
It’s going to be a little difficult to not be disappointed after last week’s record drawdown in crude supplies. This week the draw should be very modest with crude falling only about 1,000,000 barrels. Products should also fall by 1,000,000 barrels apiece but even though we get a bit of a reprieve from the dramatic supply drawdowns, our expectations are they will start to resume in the coming weeks.
In the coming weeks, we’re going to see the impact of the Strategic Petroleum Reserve policies and how we tried to avoid short-term price gain pain with policies that discouraged investment and production. Low prices caused another drop in the US oil rig count. Oil rigs fell to 525 vs 529 the prior week and gas rigs 128 vs 128 the prior week. Rigs were up at 625 to start the year so we’ve lost nearly 100 and DUCs are exhausted. There aren’t many taps to turn on if oil prices run (at least not in the US) according to Adam Button.
US inventories have been drawn down near record lows and people are starting to question why we exported so much of our SPR oil to China and why China has been building up its SPR with oil from the US and Russia. Reuters reports that—China’s state-controlled Shaanxi Yanchang Petroleum Group is expected to double its purchases of Russian ESPO blend this year to about one million metric tons, according to two sources familiar with the plant’s operations. The company is due to start up a 50,000 barrels per day crude processing unit at its refinery in landlocked Shaanxi province in the north later this month, after retooling work that allows the plant to process more crude, the sources said.
Fox News reported that “Energy Secretary Jennifer Granholm engaged in multiple conversations with the Chinese government’s top energy official days before the Biden administration announced it would tap the Strategic Petroleum Reserve (SPR) to combat high gas prices in 2021. Granholm’s previously-undisclosed talks with China National Energy Administration Chairman Zhang Jianhua—revealed in internal Energy Department calendars obtained by Americans for Public Trust (APT) and shared with Fox News Digital—reveal that the Biden administration likely discussed its plans to release oil from the SPR with China before its public announcement.
According to the calendars, Granholm spoke in one-on-one conversations with Jianhua, who is a longstanding senior member of the Chinese Communist Party, on Nov. 19, 2021, and two days later on Nov. 21, 2021. Then, on Nov. 23, 2021, the White House announced the release of 50 million barrels of oil from the SPR, the largest release of its kind in US history at the time. “Secretary Granholm’s multiple closed-door meetings with a CCP-connected energy official raise serious questions about the level of Chinese influence on the Biden administration’s energy agenda,” APT Executive Director Caitlin Sutherland told Fox News Digital. “Instead of focusing on creating real energy independence for America, Granholm has been too busy parroting Chinese energy propaganda and insisting ‘we can all learn from what China is doing,’” Sutherland continued. “The public deserves to know the extent to which Chinese officials are attempting to infiltrate US energy policy and security.”
In a statement, the DOE said the meeting was broadly part of the agency’s effort to combat climate change but didn’t share what was discussed at the meeting. “Solving the climate crisis means engaging with competitors and allies in clear and substantive discussions—especially among the nations emitting the most carbon pollution into the atmosphere,” a DOE spokesperson told Fox News Digital. “We must all address the transnational challenge of climate change to our planet.”
As part of its announcement in November 2021, the White House said it was releasing oil from US reserves in conjunction with “other major energy-consuming nations including China.” However, President Biden said in remarks after the announcement that China “may do more as well” and Granholm told reporters during a press briefing that China “will make its announcement.” Republican leaders have warned that China, instead of releasing oil stocks, has increased its reserves since Biden and Granholm’s announcement in November 2021. They have argued the SPR releases weakened US national security and bolstered foreign adversaries’ “geopolitical leverage.”
“China ramped up its purchases of crude oil from Russia and the United States to boost its reserves, even as oil prices surged and President Biden called for a coordinated release,” House Energy and Commerce Chair Cathy McMorris Rodgers, R-Wash., and former GOP Rep. Fred Upton wrote to Granholm last year. “As a result, China may now control the world’s largest stockpile of oil, with total crude inventories estimated at 950 million barrels,” they added.
In addition, the White House and Department of Energy have been heavily criticized for allowing SPR sales to flow to Chinese state-run energy companies. The White House then fired back in July 2022, arguing that its hands were tied since it is legally required to sell SPR oil to the highest bidder. A must-read on Fox News. A story that will get bigger as we will start to feel the supply squeeze caused by the lack of investment.
Natural gas is steady as she goes. EBW Analytics reported that the September contract continued to grind lower early last week to seven-week lows on fading weather-driven demand outside of Texas, elevated production readings, continued weak LNG exports, and enduringly weak natural gas spot pricing at Henry Hub. Still, a fourth consecutive supportive EIA storage report carried the storage surplus vs. the five-year average to a four-month low—and headed lower. While it may not fully stem near-term declines, falling surpluses may prove sufficient to moderate downward momentum.
Learn more about Phil Flynn by visiting Price Futures Group.