The Energy Report: Play It

I was shocked to hear there was gambling going on at Ricks Café and equally shocked to hear that Biden’s price caps on Russian oil have failed. In 2022 the administration of Joe Biden tried to impose a price cap to cut oil revenues for Russia, a major source of funding for its war against Ukraine. Now as my buddy Anas Alhajji points out, the Russian Urals crude price is about $15 above the price cap and is very concerned about who is going to tell Treasury Secretary Yellen or Biden.

Of course if Ms. Yellen or Biden read my report back then, I could have saved them the trouble of putting on the ill-fated price cap in the beginning. I predicted that the price caps would fail and if they asked me, who knows, it could have been the start of a beautiful friendship.

I’m no good at being noble, but it doesn’t take much to see that the problems with price caps are that they never work, and never have worked. People will either find a way around them or if they are truly enforced, it will lead to shortages. You show me a price cap, then I will show you a shortage. Yet the shortage did not happen because the price caps were never enforced.

This week Reuters reported that a group of Western insurers said a Russian oil price cap has become unenforceable and only pushed more ships into joining a shadow fleet, delivering one of the harshest rebukes to the measure that had been meant to cut revenue to the Kremlin. Now there are more calls in congress to lift the Russian oil price caps and try – maybe – some sanctions that might work.

First the Biden administration has been trying to convince people over the last couple of years that the price caps were working. Now it’s clear that they never really did work and I told them that.

Biden’s spendthrift ways of throwing money at the electric car industry, as we said, was doomed to fail and it is failing. Biden’s attacks on the US oil and gas industry and the reversal of many of Trump’s policies on energy was the start of his problems. Killing pipelines, drilling moratoriums and extreme regulations are some of the factors that is causing inflation. His tapping of the Strategic Petroleum Reserve for purely political purposes was part of his ill fated energy policy. Biden’s foreign policy in the Middle East by going hard on Saudi Arabia and soft on Iran has had devastating consequences for the globe. Biden’s energy policies may very well be the reason why he could lose his reelection. Maybe he’ll always have Paris. Paris, as in the Paris Climate accord, at least until the next president pulls out of it. Here’s looking at you, kid.

Yet this week it was the Fed that did more to bring down oil prices than anything Biden or Janet Yellen did. This week the story was bigger than expected increase in crude oil supplies, disappointing gasoline demand and real concerns that the Federal Reserve was going to have to induce a recession to get inflation under control. The problems are being complicated by a slowdown in US manufacturing and talk of the possibility of stagflation is permeating the marketplace. This puts emphasis on today’s jobs report. The other thing that we’ve seen in oil this week is the unwinding of geopolitical risk factors. It’s almost amazing to me that oil prices took seriously the possibility that ceasefire talks were going anywhere, but they obviously did.

It’s going to be interesting to see how oil traders will prepare for what may be coming this weekend as many sources believe that Israel will start to move into Rafah this weekend. This comes as the Wall Street Journal reports that, “The Pentagon is shifting jet fighters, armed drones and other aircraft to Qatar, repositioning its forces to get around restrictions on conducting airstrikes from an air base long used by the U.S. in the United Arab Emirates. The U.A.E. informed the U.S. in February that it would no longer permit American warplanes and drones based at Al Dhafra air base in Abu Dhabi to carry out strikes in Yemen and Iraq. That has prompted U.S. commanders to send the additional aircraft to Al Udeid air base in Qatar, the small Persian Gulf monarchy that hasn’t imposed similar restrictions, U.S. officials said.”

Oil should be close to the low and the correction should be over. If the jobs market is not too hot, then the bottom should be in as the risk premium goes back in.

Natural gas is putting up a good fight in the face of an overwhelming supply. Codes for the US domestic natural gas market is in fact that natural gas prices are historically cheap and data centers unquenchable demand for power continues to grow to incredible heights. With the emergence of cryptocurrencies, artificial intelligence, electricity demand is going to be going through the roof and is it possible that the US natural gas market will be saved by this incredible surge and demand. More on that next week.


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The Energy Report: Fed Freak Out
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