Oil prices rebounded yesterday from signs that the geopolitical tension may not have eased as much as previously believed. After the close we saw the American Petroleum Institute (API) report that petroleum supplies came in tighter than the market was expecting. The API reported the crude oil inventories fell by 3.23 million barrels where the market expectation was that they were going to increase by 1.8 million barrels. We also saw a 595,000 barrel drop in gasoline inventories and distillate inventories eked out a gain of 724,000. Attacks on Russian oil infrastructure and commitments by Russia to lower oil production and keep exports steady should provide some support for diesel. We did see some weakness in a report that Chinese refinery runs fell by 919 kb/d to a seven-month low but that could be offset by signs that maybe this week US demand is going to look robust, at least compared to recent weeks.

The reduction of the war premium in oil came when it appeared that the global tensions between Israel and Iran had calmed down, yet that war premium is creeping back in on reports as Israel is warning civilians to get out of Rafah as they prepare an invasion. Reports say that Israel is getting ready to find tents for Palestinian civilians they intend to evacuate before the invasion. There’s also some speculation that Israel’s response Iran’s attack isn’t over yet and it’s just biding its time before it sends Iran a real message.

The House and Senate passed new sanctions on Iran.  Last week Biden announced sanctions against Iranian steel and drone companies as well as 16 individuals on Thursday in response to last weekend’s aerial attack by Tehran against Israel. Yet the Biden administration is fearful to enforce sanctions on Iran? At first it was an attempt to appease Iran to try to cajole them into a new Iranian nuclear accord that supposedly fixed all the problems with the previous accord that President Trump rightly pulled out of. Now it appears that Iran just used the negotiations to fortify their economic position and their oil production and now it is seeing their exports hit a six-year high. Iran used its Biden oil windfall of course to fund their operations and support groups like Hamas, Hezbollah and the Houthi rebels.

While the Biden administration fails to enforce sanctions on Iran, the truth is that innovation in the oil and gas industry in the US could replace Iranian oil production if there was incentive to do so. Reuters reported that, “Technology advances are making it possible for U.S. shale oil and gas companies to reverse years of productivity declines, but the related requirement to frontload costs by drilling many more wells is deterring some companies from doing so. While overall output is at record levels, the amount of oil recovered per foot drilled in the Permian Basin of Texas, the main U.S. shale formation, fell 15% from 2020 to 2023, putting it on par with a decade ago, according to energy researcher Enverus.

Reuters writes that, “That is because fracking, the extraction method that emerged in the mid-2000s, has become less efficient there. In the technique, water, sand and chemicals are injected at high pressure underground to release the trapped resources. Two decades of drilling wells relatively close together, resulting in hundreds of thousands of wells, have interfered with underground pressure and made getting oil out of the ground more difficult. “Wells are getting worse and that is going to continue,” said Dane Gregoris, managing director at Enverus Intelligence Research firm.

But new oilfield innovations, which began being implemented more widely last year, have made it possible for fracking to be faster, less expensive and higher yielding. The advances in the past few years include the ability to double the length of lateral wells to three miles and equipment that can simultaneously frack two or three wells. Electric pumps can replace high-cost, high maintenance diesel equipment. “Companies now can complete (frack) wells faster and cheaper,” said Betty Jiang, an oil analyst with Barclays.

A drawback to the new simultaneous fracking technology, also called simul-frac, is that companies need to have lots of wells drilled and ready to move to the fracking phase in unison before they can proceed. Pumps inject fluids into and get oil and gas out of two or three wells at the same time, instead of just one. Because these act as an interconnected system, wells cannot be added piecemeal. But companies eager to cut costs have not deployed enough drill rigs to capitalize fully on the potential of the innovations.”

The Biden administration is very anti fossil fuel production in the United States. While they are trying to take credit for record oil and gas production, it’s clear that most of the gains have been made by innovation by the oil and gas industry and most of it has been done on private lands. Private oil and gas companies have been flourishing despite the attempts by the Biden administration to accuse them of war profiteering and price gouging. Matador Resources Co. pumped more oil than expected in the first three months of 2024 at a time when most US producers have pledged flat to moderate output growth this year.

Bloomberg reports that Matador’s 2% production over-performance to start the year was done while spending less money on drilling than projected, the company said. During the first quarter of 2024, Matador’s average oil production of 84,777 barrels per day beat its guidance of 83,500 barrels, the company said. “We now expect full-year production for 2024 at the high end of our previously announced average production guidance for oil of 91,000 to 95,000 barrels of oil per day,” the statement said.

The commodity super cycle comes in waves. Coffee and cocoa are making historic moves and industrial and precious metals are back in vogue. Major players have been taking notice and shifting their investments back to the futures. Bloomberg News is reporting that, “Some of the world’s biggest energy trading companies are returning to metals, years after getting burnt in the notoriously difficult markets. Vitol Group, Gunvor Group and Mercuria Energy Group are among the traders building out their metal’s teams, as they look to deploy capital generated by record profits. The shift comes as forecasters turn increasingly bullish on copper, aluminum and other metals, where long-anticipated production shortfalls are starting to take shape. Many commodities house’s also see strong links between metals usage and power markets — another growth area for traders according to Bloomberg.

What are we going to do with the electric car glut. The Biden administration says that we are in a race with China to control the EV market. The problem is that the Chinese consumers, like the American consumers, just don’t not want them. Oh sure,  the International Energy Agency claims that, “over 20% of global car sales this year are projected to be electric, driving a transformative shift in the auto industry and cutting oil use for transport.” Yet these are the same folks that predicted that global oil demand would peak years ago.

Reuters reported that, “By most measures, the last thing China needs is more electric cars crowding a market with more losers than winners, driving down prices at the expense of profit and taking the fight for market share beyond China. And that’s just what it is getting. Automakers are expected to launch 110 EVs and plug-in hybrids in 2024, many at the Beijing auto show that starts Thursday. Those new offerings, dominated by Chinese brands, will join By contrast, there were just over 50 EV models on sale in the United States last year. But while there is a peril in China’s overcapacity, there is also a power in the hyper-competition it has unleashed, analysts, suppliers and executives say. China’s leading EV makers have found ways to slash vehicle development time, combining speed to market with new features and a pricing advantage rivals outside cannot match. the almost 400 “new energy” models already in China’s showrooms, according to industry data.” But the main problem is still sales, which even though they are growing in China, are not growing at the pace to get rid of the oversupply. And there doesn’t appear to be any plan to deal with the batteries once they start to go bad in 10 years.

Natural gas is still trying to put in a little bit of a bottom here. It has a tough road ahead. We are looking for an injection of 85 BCF this week.

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