Russian President Vladimir Putin is holding Russian oil and gas hostage and will refuse to release it unless you pay for it in rubles. Oil prices and diesel prices soared after reports came out that Russia cut off the gas supply to Poland and later to Bulgaria out of concern that the reduced supply of natural gas to Europe will force the continent to use alternative forms of energy, mainly oil and diesel, which already is globally undersupplied.
The news helped feed the diesel price squeeze driving the ultra-low sulfa futures contract to an all time-record high close of $4.4679 after a move of epic proportions. Prices eased a bit after it was reported that at least four countries in Europe gave into Russia’s demand that they pay in rubles even though Russia’s contracts specifically called for payments in other currencies. The Russian ruble, as we all remember, was the joke currency of the Soviet Union, the former evil empire and because of its instability, even during the Putin years, most international trades discouraged using rubles as a form of payment.
Putin’s use of Russian oil and gas should not be a surprise. I have written many times before that Russia never has been a reliable supplier of energy. Putin’s track record has proven over the years that he has no compunction to use oil and gas as a weapon. That should make us really worried about his threats to use the nuclear option in Europe. This is why I get so frustrated with these short-sighted green energy policies that are not based on science or reality and very clearly has put the globe in a very dangerous situation. If you are concerned that climate change can wipe out the planet, just wait until you see what nuclear weapons could do.
The point is that climate extremism has created a much bigger threat to humanity than climate change. That is not to say that we shouldn’t work towards cleaner energy but one that is based on real science and done in such a way where it won’t endanger the world, empowering madmen like Putin and other dictators and put undue hardship on the poor and the middle class.
At this point, Bulgaria, Poland and Germany are standing firm refusing to pay Russia in rubles. Oil prices sold off but rallied back after it was reported that at least some European countries have decided to give in to Putin and pay for gas in rubles. Yet, this did not appease the Russian government, which is demanding that all countries give in to their demands or get their supply cut off.
So what that means obviously is that the potential cut-off of Russian oil and gas to other countries in Europe is offsetting the weaker demand fears from China. Even Germany is saying that it is speeding up its efforts get off of Russian oil and gas. In a nutshell, any more cuts from Russian gas will lead to countries seeking alternatives, thereby supporting the market.
That is why oil inventories around the globe are going to be very important. In the U.S. yesterday, the American Petroleum Institute reported that U.S. crude supplies increased by 4.780 million barrels. That’s a pretty good supply increase and came with help of over a 2-million-barrel release from the strategic petroleum reserve. Yet, even with the increase in crude supplies of 4.4679, distillate supplies increased by only 431,000 barrels and gasoline supplies fell by a whopping 3.91 million barrels.
The very slight increase in diesel supplies is going to do nothing, absolutely nothing, to ease the concerns of a global distillate squeeze. Still, after yesterday’s incredible run, we may see a bit of profit-taking but it should be a warning sign to the United States and the rest of the globe that we have a global supply shortage of diesel fuel.
Even natural gas got caught up in the excitement. Oh sure, part of the reason why natural gas surged yesterday was because of the continuing cold weather across most of the country. The poor farmers cannot get into the fields in many parts of the country to start planting the crops, which is a bigger concern when we’re facing a world with a global supply shortage of grain. Too bad we do not have a strategic natural gas reserve! I am just kidding, of course! We do have a strategic natural gas reserve, yet U.S. President Joe Biden banned drilling on federal lands, so it’s going to be a little bit more difficult to produce.
How did you sleep last night. Yesterday’s move is one of the reasons we’ve been warning users and buyers that just about every petroleum product needs to be hedged for the last couple of years even when people were talking about peak demand and other bearish stories that never really materialized. We were steadfast in our belief that the globe was facing a very tight energy market and we continue to see those risks play out right in front of our very eyes. Downside risks are still China, the potential for an Iranian nuclear deal that some reports say could still happen even though I have my doubts. Yet, the biggest downside risk is a recession that some believe we’re already in the early stages of . But it is unclear at this point as to whether or not that’s going to have a significant impact on energy demand in the short term. We do know that historically recessions do cause a drop in demand, yet, we’re not really seeing that in the numbers. It might happen in the future, so keep an eye on the demand numbers going forward. In the meantime, use breaks to be hedged. It’s time to be safe rather than sorry.