The Energy Report: Running Out Of Options


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Oil prices are coming back as the dollar pulls back and markets start to realize the world is running out of options. The Biden administration is already warning that they’re preparing for a December price spike and there is a big debate as to whether they should extend releases from the Strategic Petroleum Reserve that they’ve already drained to the lowest level since 1983. And the bigger issue is how are they going to replenish those supplies in the future.

Reuters is reporting that “U.S. Treasury Secretary Janet Yellen on Sunday said Americans could experience a spike in gas prices in the winter when the European Union significantly cuts back on buying Russian oil, adding that a proposed Western price cap on Russia’s oil exports is being designed to keep prices in check. “It’s a risk, and it’s a risk that we’re working on the price cap to try to address,” Yellen told CNN. The possible price increase could come because the EU “will cease for the most part buying Russian oil” and impose a ban on services that allow Russia to ship oil by tanker, she said.” This is not the first warning by the Biden administration admitting that there could be a major price spike in the future.

The expected oil embargo that the EU plans to put in place is making world leaders nervous, especially Biden, whose diplomacy failed to stop Russia’s invasion of Ukraine and has done more than any President to restrict US production of oil and gas.

The Wall Street Journal reported last week that Biden’s Interior Department leased 126,228 acres for drilling through Aug. 20, his first 19 months in office, the analysis found. No other president since Richard Nixon in 1969-70 leased out fewer than 4.4 million acres at this stage in his first term. Harry Truman was the last president to lease out fewer acres, 65,658-in 1945-46 when offshore drilling was just beginning, and the federal government did not yet control the deepwater leases that have made up the largest part of the federal oil and gas leasing program in modern times according to the Journal.

The war in Ukraine is continuing. Bloomberg News reported that “Russian defenses had crumbled as Ukraine forces took over the key territory. Unconfirmed reports overnight suggested Kyiv’s troops had taken Velykyi Burluk, a town about 90 kilometers (56 miles) east of Kharkiv and not far from the Russia-Ukraine border. The town of Chkalovske was also retaken, and all eyes are on strategically located Izyum. Russia’s Defense Ministry on Sunday published a map showing much of the country’s forces out of the Kharkiv region, without commenting further.

With the war not going so well, the odds of Russia using oil and natural gas as political weapons are rising. Not only that, there are concerns that Russia will be on the deal to move Ukrainian grain out of the country which could mean upside risk for both oil and grain and the possibility that that could add even more drama on a day when we get the USDA report.

The other issue that should support oil is the fact that the Biden administration failed to secure a nuclear deal with Iran. As we have said for some time, the odds of getting a nuclear deal were very low and it appears that for the near term the prospects of a deal are very low. This is one downside risk that has gone away.

The big question for the markets now is whether Europe will follow through with the Russian oil embargo. If they do, we know that the market will be on guard for a price spike. It’s very possible that they will blink before the embargo goes into place. Yet make no mistake about it, global inventories are tight whether they decide to go with an embargo or decided against it.

We expect to see gasoline and distillate demand pick up this week in the weekly inventories which could lead to drawdowns in both products. Crude oil might see a slight build because of an expected large release from the strategic petroleum reserve. We continue to recommend using this weakness to get prepared for winter.

Natural gas prices pulled back last week but they’re trying to find some support. EBW analytics reports that “The October natural gas contract collapsed on Tuesday as production surged to all-time highs while technical signals turned decisively bearish after breaking support at the 20-day moving average. Intraday lows, though, formed support in the $7.75-$7.82/MMBtu range. While the NYMEX front-month may attempt to probe higher early this week, the combination of softening weather-driven demand, strong natural gas supply, and possible tropical storm development, suggest another retest of support is likely within 7-10 days.

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