The Energy Report: OPEC’s Long Game

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While the United States has embarked on self-defeating and short-sighted energy policies, it appears that the OPEC long game led by Saudi Arabia is starting to pay off. After the Saudis engineered an extension of the OPEC and Russia production cuts as well as promises of compensation cuts by cheating producers, they now feel confident enough to raise prices sharply as US energy producers are signaling retreat. Saudi Aramco raised the official selling price for their coveted Saudi Aramco Arab Light by $0.20 per barrel over the Oman/Dubai average, putting April deliveries up $1.70 per barrel more than the Oman/Dubai average, up from $1.50 per barrel this month. S&P Global reported that, “Europe was the only slow-demand part of the world.”  More and more, OPEC will profit off of that demand while the US oil production growth is expected to go into retreat.

This Saudi price increase comes at the same time the American Petroleum Institute (API) reported that US petroleum supplies were tighter than market expectations. This could signal the start of a trend of tightened supply that could keep prices of gas and diesel high even on reports that the BP working refinery may be back online giving the Midwest some pump price relief.

The API reported crude oil inventories rose by 423,000 barrels much less than the 2.6-million-barrel build expected. The API said gas inventories fell this week by 2.8 million barrels, after a 3.272-million-barrel inventory drop last week and are about 2% below the five-year average for this time of year. Distillate inventories also fell this week, by 1.8 million barrels and are about  8% below the five-year average.

US foreign policy also does not seem to be making oil transit safer. A report from a source called the ‘Iran Observer” claimed that Iranian naval forces seized a US oil tanker in the Gulf of Oman.” If true that would add more risk premium from the axis of risk premium, the country of Iran that has been the main driver of oil risk premium.  Iran spent its recent oil fortunes they have received because of lax sanctions enforcement by the Biden administration on supporting Hamas Hezbollah and those pesky Houthi Rebels that finally sunk their first ship last week.

Al Arabiya reports that, “Iran will unload about $50 million worth of crude from a Marshall Islands-flagged tanker seized last year, the semi-official Fars news agency reported on Wednesday, in a tit-for-tat action against the United States. Advantage Sweet is a Suezmax crude tanker that had been chartered by US firm Chevron and was seized in April 2023 by Iran’s army following an alleged collision with an Iranian boat.

While those in the oil industry started to worry about the decline rate from lateral wells, the Energy Information Administration has touted the success of the US oil and gas industry that was made by innovation by private companies and not the government. The Biden administration points to rising US oil production as a sure sign that their anti-fossil fuel agenda is having no impact on prices even as US consumers bear the brunt of these self-defeating policies. This is an administration that was against US oil and gas before they were for it and again against it, depending on who they are talking to. It is never their policies that are to blame, it’s either the oil companies or the food companies but they are first in line to take credit for the work of the US oil and gas industry. You know, the price gougers and war profiteers as Biden calls them. Yet despite the vitriol and indignities, the US oil and gas industry has had to take from this hostile administration, they continue to shine with innovation that gives hope to the world.

The EIA writes about that success by saying that, “U.S. crude oil production averaged 13.3 million barrels per day (b/d) in December 2023, following sustained productivity increases at new wells, according to our latest Petroleum Supply Monthly (PSM). U.S. crude oil production has increased to record highs since 2010 and has risen even more quickly in recent months. These record highs have come despite declining U.S. drilling activity because the new wells are more efficient. Since first surpassing the previous record in August 2023, U.S. crude oil production has increased another 2%, exceeding the pre-pandemic November 2019 peak by 0.3 million b/d.

The number of new wells brought online by drilling activity has historically been the key determinant of whether crude oil production increases or decreases. However, advances in horizontal drilling and hydraulic fracturing technologies have increased well productivity, enabling U.S. producers to extract more crude oil from new wells drilled while maintaining production from legacy wells according to EIA.

Yet last year’s US shale oil production growth rate is expected to slow significantly. If true that would ensure that we head into a supply deficit later in the year. More stimulus in China as well as expected future rate cuts by the Fed should feed a surge in global oil demand as well. Industry insiders say that the uncertain investment environment is making it more risky to continue to invest in shell wells new legislation better by the ministration to round the methane releases and other regulations that are being proposed could sharply curtail investment and drilling in the US oil and gas sector.

That is making Crown Prince and Prime Minister of Saudi Arabia Mohammed bin Salman Al Saud’s supply management campaign a success at the expense of consuming nations’ interests, while the US and Europe have made some ridiculous decisions in the name of green energy and saving the planet. Saudi Arabia and Russia stayed focused on global energy needs and the fossil fuel realities giving them huge advantages as we move into an era of petroleum markets woefully underinvested in for our future.

You know $80.00 for oil in the short term could see some resistance yet the monthly charts are looking very bullish for a potential move to 90 within the next couple of months. Oil products also are under-supplied and it’s going to be very interesting to see if the market is going to be able to keep up with demand at these price levels prices. More than likely the market is going to have to rise fairly significantly to keep up with demand.

Natural gas is balancing cutbacks in production versus warm weather as well as the uncertainty created by the Biden administration as far as LNG exports based upon his study of its impact on the environment.

EBW Analytics reports that rapidly falling production scrapes are down 3.0 Bcf/d over the past four weeks, including EQT’s announcement of its own 1.0 Bcf/d of curtailments for March. Still, exceptionally mild March weather may drive surging storage surpluses to add 175 Bcf vis-à-vis the five-year average. Including Canada, North American surpluses may reach a staggering 900 Bcf above five-year normals. Bullish technical and tremendous outstanding speculator shorts offer further upside price risks in the near term. Fundamentally, however, a sustained period of low prices this spring may be needed to support elevated electricity coal-to-gas switching and keep curtailed producer volumes out of the market.


More By This Author:

The Energy Report: Commitment
The Energy Report: Winter Warming Warnings
The Energy Report: Back Peddling And Mis-Selling

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