Photo by Timothy Newman on Unsplash
 

Fossil fuels are making a big comeback as big draws across the board shocked the market back into a semblance of reality. The American Petroleum Institute (API) reported a trifecta of draw down with crude falling by a more than expected 4.495 million barrels and gasoline down 1.917 million barrels and distillates down 322,000.

Yet in a larger sense the fossil fuel comeback is even larger than that as the smart money gets that the need for fossil fuels is growing and despite the shame that some tried to put on investors into fossil fuels, it may be one of the hottest sectors to invest in.

Many investors are waking up and taking a cue from Charlie Gasperino’s new book “Go Woke, Go Broke: The Inside Story of the Radicalization of Corporate America” and embracing the realities of this brave new world called reality and the economy of the future, power.

Naureen Malik at Bloomberg reported, “just a stunning auction — prices soared to all-time highs for the PJM grid, every gas and coal plant offered into the auction was selected, and Baltimore/Virginia hit price caps of over $400 for every megawatt supplied for every day.” Malik wrote that, “Power prices on the biggest US power grid are about to hit a record high amid a wave of plant retirements and surging demand, thanks in part to new data centers being built.

Generators that provide electricity to the 13-state grid that stretches from New Jersey to Illinois will get a record $269.92 per megawatt-day from utilities to provide capacity over a 12-month period starting in June, according to results of an auction by grid operator PJM Interconnection LLC disclosed Tuesday. That’s more than a ninefold increase from $28.92 in last year’s auction.

“The market has spoken and it is saying you are going to have to pay a lot more for reliable power,” Paul Patterson, a power market analyst for Glenrock Associates, said in an interview.

Malik said that, “The results of the auction underscore the challenges of the energy transition: cheap solar and wind power are making older plants, including coal-fired generators, less competitive, but a sudden burst of electric demand to meet the needs of factories and data centers to enable artificial intelligence along with broader electrification risks straining grids. “We do believe those higher prices will send a clear investment signal” to maintaining existing resources and building new ones, Stu Bresler, PJM’s executive vice president of market services and strategy, said in a media briefing.

The other factors that are bottoming oil and products are a renewed focus on geo-political risks. The hopes that Israel stated response against the Hezbollah attacks would lower tensions and keep cease-fire talk between Hamas and Israel have been dashed.

The Wall Street Journal said that, ”Israel killed one of Hezbollah’s top military leaders in an airstrike in Beirut intended as retaliation for a Saturday attack on the Israel-controlled Golan Heights that killed 12 young people, a response that came amid fears of a widening war in the Middle East. The strike on Fuad Shukr, the highest-ranking leader of the group to be killed in years, risks sharply escalating tensions between Hezbollah and Israel.

Qatar’s Sheikh Mohammed bin Abdulrahman bin Jassim Al Thani, the mediator in the ceasefire reacted by saying, “How can mediation succeed when one party assassinates the negotiator on the other side? Peace needs serious partners & a global stance against the disregard for human life.

Egypt is warning this morningthat the escalation along with no progress in the Gaza ceasefire talks will complicate the situation. Iran supreme leader is now saying that he’s considering avenging the death as a duty as he was killed in Iran.

So the reasons to be pushing fossil fuels further to the downside on the last day of the month are running out. Yet as bullish as these developments seem to be you can always count on the Fed to add a little extra drama.

The first thing oil traders will have to deal with is the Energy Information Administration (EIA) report that comes out at 9:30 if it generally confirms what we saw from the American Petroleum Institute report that should inspire further gains in the market.

Yet that may be tempered by fears of what the Fed may signal or not signal after today’s rate decision at 1:00 PM central time. While most people expect the Fed to stand pat this month, they also expect Federal Reserve Jerome Powell to signal quite strongly that we will get an interest rate cut very shortly.

The Fed does indeed signal rate cuts sooner rather than later. The underlying fundamentals for oil and fossil fuels are extremely bullish. The recent price correction seems to be way overdone and we would expect a retest of the highs over the next month despite concerns about a slowing economy in China and the suspect demand the supply and demand numbers are going to speak for themselves and ultimately we’re starting to see supplies contract.

Natural gas futures are starting to get a boost as the heat is on. Expectations are cooling demand will be through the roof over the next couple of weeks and is keeping the market on edge.

EBW Analytics is reporting that August weather may be the hottest in history, with power burns further amplified by cheap spot gas spurring a further 2.0 Bcf/d of fuel-switching since late June. With Freeport back, August may feature a sub-75 Bcf monthly build.

The production outlook is shifting less bearish with delays to the Matterhorn pipeline and producers highlighting a willingness to curtail supply if prices dip. Still, the market needs tight fundamentals—and low prices to generate supply shut-ins and fuel switching—to narrow surpluses over the next 60-90 days. Short-covering risks pose a chance of non-fundamental upside, however.

With weather being a key factor make sure you download the Fox Weather Ap. Fox weather says that, “A tropical disturbance is being tracked in the Atlantic Ocean for the first time since Hurricane Beryl’s assault on Texas three weeks ago. According to the National Hurricane Center (NHC), a large tropical wave centered several hundred miles east of the Lesser Antilles is producing limited shower activity due to environmental dry air.

“Conditions are forecast to become a little more conducive for development over the warmer waters of the southwestern Atlantic Ocean, and a tropical depression could form late this week while the system is in the vicinity of the Greater Antilles or the Bahamas,” the NHC said in its latest outlook. “Interests in the Greater Antilles, the Bahamas, and the southeastern U.S. should monitor the progress of this system.”

The odds of development have been slowly increasing since the weekend and currently stand at a 60% chance over the next seven days.

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Demand Is Golden. Manic Metals Report
The Energy Report: Weakness In Different Forms
Democracy And Oil. The Energy Report, July 29, 2024