The Energy Report: Ruble Rules

Pump Jack, Oilfield, Oil, Fuel, Industry, Petroleum

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Russia is once again blackmailing Europe by cutting off oil flows through the Druzhba pipeline, which ironically is the Russian word for friendship. That pipeline carries crude oil some 2,500 miles from the Urals to Central Europe cutting off supply to Hungary, Slovakia, and the Czech Republic. Russia cut off supply as a reminder to Europe that they could do it and to force these countries to pay for that oil in rubles.

Apparently, those countries are going to give into that blackmail as reports suggest that oil flows are resuming and that these countries will pay for the oil in Russian rubles. Javier Blass at Bloomberg tweeted that Hungarian refiner Mol says it paid Ukraine a transfer fee to restart crude oil flows from Russia to central and eastern European via the de Druzhba pipeline.

The news of course has the Russian ruble exploding again to the upside as the free world gets frustrated. The sanctions they try to impose on Russia seem to be failing especially because of Europe’s dependency on them for energy. Remember Biden talked about the toughest sanctions imposed ever? The sanctions that he at first said would deter Russia from invading Ukraine and later said that sanctions never were intended to stop the invasion. That of course makes one wonder why they put on sanctions at all. It is also raising the question of whether Europe will give up on all energy sanctions as it is clear they have sold their energy soul to Vladimir Putin over the past couple of decades and because their green energy transition has made them dependent and the Russian leader. The lifting of energy sanctions against Russia would be a bearish event in the short term but can Europe really afford to retreat at this point?

What makes this more of a concern is that the summer that’s already been hot in Europe seems to be getting hotter with another heat wave plaguing the continent. This week German and French power prices hit record highs putting pressure on energy supplies ahead of the critical winter period according to Bloomberg. They point out, “While demand and prices typically drop off in the summer, this year a decline in Russian gas supplies during the key stockpiling season — as well as reduced power output in France — has underpinned a blistering rally.”

Bloomberg also reports that In France, the heat has threatened nuclear-reactor output, since environmental rules limit the discharge of water into the surrounding waterways when river temperatures rise. However, Electricite de France SA received a waiver to keep several of its plants online as the nation struggles to produce enough power. French electricity for next month fell as much as 1.8% to 520 euros a megawatt-hour.

Sure, in the US oil prices are down even though the Energy Information Administration’s “Short-Term Energy Outlook” seems to suggest the global markets are still undersupplied and even next year will only be oversupplied by a minuscule amount. The EIA said that “The August Short-Term Energy Outlook (STEO) is subject to heightened uncertainty resulting from Russia’s full-scale invasion of Ukraine, how sanctions affect Russia’s oil production, the production decisions of OPEC+, the rate at which U.S. oil and natural gas production rises, and other contributing factors. Less robust economic activity in the EIA forecast could result in lower-than-forecast energy consumption.

EIA forecasts the spot price of Brent crude oil will average $105 per barrel (b) in 2022 and $95/b in 2023. U.S. crude oil production in the EIA forecast averages 11.9 million barrels per day (b/d) in 2022 and 12.7 million b/d in 2023, which would set a record for most U.S. crude oil production in a year. The current record is 12.3 million b/d, set in 2019. EIA estimates that 98.8 million b/d of petroleum and liquid fuels were consumed globally in July 2022, an increase of 0.9 million b/d from July 2021. We forecast that global consumption of petroleum and liquid fuels will average 99.4 million b/d for all of 2022, which is a 2.1 million b/d increase from 2021. We forecast that global consumption of petroleum and liquid fuels will increase by another 2.1 million b/d in 2023 to an average of 101.5 million b/d.

The U.S. retail price for regular grade gasoline averaged $4.56 per gallon (gal) in July, and the average retail diesel price was $5.49/gal. EIA expects retail gasoline prices to average $4.29/gal in the third quarter of 2022 (3Q22) and fall to an average of $3.78/gal in 4Q22. Retail diesel prices in the EIA forecast average $5.02/gal in 3Q22 and $4.39/gal in 4Q22. U.S. refineries average 93% utilization in 3Q22 in our forecast, because of high wholesale product margins. Elevated prices for gasoline and diesel reflect refining margins for those products that are at or near record highs amid low inventory levels.

In the short term that might not matter because reports are suggesting that we could see some more COVID lockdowns in China. There are reports that COVID-19 is spreading fast in Xinjiang, Guangdong, and others.

The America Petroleum Institute (API) report was not particularly exciting. API reported that “Crude: supply increased by 2.156 million barrels while Cushing fell by 627,000 barrels. It would have been another draw without the SPR release. Gasoline supply fell by 627,00 barrels and that might suggest that the reported demand drop from EIA was indeed overstated. Distillates on the other hand increased by 1.376 million barrels.

EIA also calls for power consumption to hit to a record high in 2022 as the economy grows. EIA projected power demand will climb to 4,027 billion kilowatt-hours (kWh) in 2022, from 3,930 billion kWh in 2021, before sliding to 4,018 billion kWh in 2023. That compares with an eight-year low of 3,856 billion kWh in 2020, when the coronavirus pandemic depressed demand, and an all-time high of 4,003 billion kWh in 2018.

That is bullish for natural gas. EIA says that U.S. natural gas inventories ended July at 2.5 trillion cubic feet (Tcf), which was 12% below the 2017–2021 average. We forecast that natural gas inventories will end the 2022 injection season (end of October) at close to 3.5 Tcf, which would be 6% below the five-year average. We forecast that U.S. LNG exports will average 10.0 Bcf/d in 3Q22 and 11.2 Bcf/d for all of 2022, a 14% increase from 2021. This increase is the result of additional U.S. LNG export capacity that has come online and Freeport LNG resuming operations sooner than we had initially expected. In the first half of 2022, the United States became the largest LNG exporter in the world. We forecast that LNG exports will average 12.7 Bcf/d in 2023. U.S. consumption of natural gas in our forecast averages 85.2 Bcf/d in 2022, up 3% from 2021.

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The Energy Report: The Hiding Of The Bulls
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