UK Restricts; Impact On Oil

Oil prices recovery was thwarted by technical resistance along with a report that there is an 85% chance that the UK will implement Plan B COVID restrictions. Despite evidence that the omicron variant is very mild, the UK restrictions report broke the oil market by about a dollar. That was after the market was shaking off a report from the American Petroleum Institute that showed a 3.705 million barrel in a sign that high gasoline prices may be tempering demand.

Yet a 3.089-million-barrel crude draw even with a strategic petroleum reserve enhanced a 2.395-million-barrel increase in Cushing, Oklahoma. Distillates also increased by 1.228 million barrels. But then a report that Pfizer and biotech say that three vaccine doses neutralize the omicron variant brought prices back up, so instead of trading oil market fundamentals it seems like we're bouncing back and forth on omicron headlines this morning.

We also received a report by Platts that OPEC Plus increased oil production by 500,000 barrels a day in November, led by Saudi Arabia Nigeria and Iraq. Platts OPEC pumped 27.85 million barrels a day but still are below their agreed-upon output numbers. Still, it shows that OPEC plus Russia is making at least some attempt to keep the market supplied.

Traders need to look at gasoline demand numbers today for a sign of potential demand destruction. Two weeks in a row we've seen gasoline demand falter and that is raising some concerns that we're seeing some resistance to higher gasoline prices. We get the Energy Information Administration report at 9:30 am central time.

Geopolitical risk is still running high. As reported, in a secure video call Tuesday President Joe Biden and Russian President Vladimir Putin spoke for roughly two hours amid escalating tensions between the two nations. The White House said Biden voiced "deep concerns" that the U.S. and its European allies share regarding Russia’s military buildup along the Ukrainian border. The administration has yet to release any specific details on what economic tactics it will use first, but by one report the White House may be looking to block Russia from the SWIFT international banking system.  In April, the European Parliament signed a nonbinding resolution that would cut Russia off from the banking network should it invade Ukraine. The U.S. has not officially taken a position on the resolution, but sources tell Fox News that Russia would view any move by the United States as an act of "economic warfare." "President Biden reiterated his support for Ukraine’s sovereignty and territorial integrity and called for de-escalation and a return to diplomacy," the White House said in a statement following the call. I am sure that Vladimir Putin is concerned about President Biden's concerns.

The FT reports that  “Fissures between U.S. oil producers and the White House were on full display at an industry gathering in Houston, as executives criticized government officials who have claimed they are not doing enough to boost supply." The Biden administration, under pressure in the polls from spiraling inflation, has searched for ways to bring down fuel prices and senior officials have begun to question why producers have not raised output.

But at the World Petroleum Congress on Tuesday, some executives said the administration was not serious about its push for more domestic oil, charging that officials were only trying to deflect criticism after turning to Saudi Arabia and others to boost supply.

“Their first response was to call Opec and ask them to pump more oil. They have not called me,” Scott Sheffield, chief executive of Pioneer Natural Resources, a leading shale oil producer, told the Financial Times on the sidelines of the conference. “And we’re the largest Permian producer,” he said, referring to the biggest US oilfield that straddles Texas and New Mexico. David Turk, deputy secretary of energy, earlier told executives at the event that the Biden administration was “not standing in the way of increasing domestic oil production to meet today’s energy needs”.

Turk, however, said that while the U.S. oil and gas industry’s top 50 publicly traded companies had made $30bn in profits in the second quarter of the year, “production has not recovered accordingly”. His comments echoed those of Jennifer Granholm, energy secretary, who in recent weeks urged US operators to increase supply while scolding them for their “enormous profits”..

Oil is back in 'apply the brakes' mode. We hope that during the turmoil some people locked in some hedges. While there are still some risks surrounding omicron and potential shutdowns, the odds are getting smaller that it will have a major impact on oil demand destruction. We could play some technical games here but we believe that ultimately oil could be substantially higher. Look at weakness to put on some bullish strategies.

Natural gas is making a bit of a rebound as temperatures might not be as warm as originally forecast. A winter chill just around Christmas may give the natural gas market new life; also natural gas traders are watching with interest as to whether Germany will comply with Biden's wishes and kill the Nord Stream pipeline if Putin invades.