Saudi Mohammed bin Salman Al Saud and Russian President Vladimir Putin seem to be taking a victory lap one day after sticking it to the global economy and to the Biden administration in particular. Yesterday, OPEC+ shocked the market with its wind-down summer doldrums into a sharp rally by announcing that Saudi Arabia would extend its voluntary ‘lollipop” oil output cut of 1 million barrels per day (bpd) for another three months until the end of December 2023.
Then they were immediately joined in the cutting oil production party by Russia whose Deputy Prime Minister Alexander Novak announced it would not only extend its voluntary plan to reduce oil exports by 300,000 barrels a day but add in another sweetener that suggested that Russia would also keep the reduction of 300,000 barrel a day in voluntary cuts until December 2023.
We are not surprised by this move. As the Energy Report has said, OPEC plus Russia would retaliate against the Biden administration's interference in the oil market by using our Strategic Petroleum Reserve and by trying to institute price caps on oil, a commodity that is very near and dear to their heart. In fact, Saudi Arabia encouraged a quick draining of the reserve by keeping their prices for oil higher realizing that the SPR would drain and that along with policies to discourage oil and gas investment, would put them back in charge of the global oil market. In fact, the move by Saudi Arabia and Russia will make it almost impossible to refill the SPR in any meaningful way as it would look bad for this administration to take more oil off the market while US commercial oil inventories are plummeting, falling over 30 plus million barrels just since July.
Saudi Crown Prince bin Salman and Russian President Vladimir Putin are pleased. In a phone call today, it was reported that the two facto leaders of the OPEC plus cartel discussed the state of OPEC+ and praised the high level of OPEC+ coordination. They say they agreed that their joint oil output cuts helped stabilize the market.
Yet what they did not say is that they are probably very pleased that they have taken advantage of Biden’s short-sighted energy policies that have led to a drop in the US oil and gas rig counts due to this administration’s discouraged investment, manipulation of our Strategic Petroleum Reserve as well as the threat of future draconian regulations and potential lawsuits against US oil and gas companies. Yet don’t worry, because perhaps Iran and Venezuela can pick up the slack as the Biden administration has turned a blind eye towards enforcing sanctions on Iran and has been easing sanctions on Venezuela.
Yet even the dirt oil coming out of Venezuela is disappointing as their exports, the great hope for Biden to help ease the diesel shortage, are falling short. Reuters reported that Venezuela’s oil exports in August fell 38% from a three-year high in July as state-run oil company PDVSA struggled to keep its heavy crude upgraders in service, according to vessel monitoring data and internal company documents.
Price caps, the ill-fated move led by Treasury Secretary Janet Yellen along with our European allies seems to be falling apart as you knew it would. Reuters reported that
“The G7 and allies have shelved regular reviews of the Russian oil price cap scheme, people familiar with the matter told Reuters, even though most Russian crude is trading above the limit because of a rally in global crude prices. Russian producers have found ways to sell oil using fewer Western ships and insurance services, making it difficult for the West to enforce the existing price cap because the companies facilitating the trade are outside of their remit.”
Besides, right now, the G-7 nations cannot afford to turn down any oil despite its origin, known or I guess you might say unknown, with a bit of willful blindness mixed in, because winter is coming, and supplies are too low.
Supplies should look tighter today after the weekly American Petroleum Institute report. The early word is it should show another crude draw led with another big drain on the Cushing, Oklahoma delivery point. If Cushing keeps draining at this rate, we may start asking the question of what we are going to do when Cushing runs dry. We are not there yet but the market has to be prepared to adjust. Diesel and gas supplies are very tight. Hedges should be established on breaks. A cold winter could provide some upside risks.
Biden’s tough approach on Saudi Arabia may be paying dividends for China and Iran. Not only has relations between China and Saudi Arabia improved, Saudi Arabia has also joined the BRICS. Now they are more chummy with Iran. Bloomberg reports that Saudi Arabia and Iran exchanged ambassadors, formally ending a seven-year diplomatic rupture between the two Persian Gulf powers that had roiled the oil-exporting region. Saudi Arabia’s new envoy, Abdullah Al-Enezi, said upon his arrival in Tehran Tuesday that
He would seek to “bolster relations and intensify contacts and meetings between the kingdom and Iran in order to move to a more hospitable space,” according to the official Saudi Press Agency.” Isn’t that nice?
Weather risks in the short term may be more tropical activity. Fox Weather is reporting, “Tropical Storm Lee has developed in the Atlantic Ocean and is forecast to strengthen into a major hurricane by the end of the week. Forecasters had been tracking Invest 95L for several days as it moved through open waters of the Atlantic Ocean.
It was upgraded to Tropical Depression Thirteen on Tuesday morning before becoming Tropical Storm Lee on Tuesday afternoon. A cyclone is declared a tropical storm when maximum sustained winds reach at least 39 mph. According to the National Hurricane Center, Tropical Storm Lee is about 1,200 miles to the east of the Lesser Antilles and has maximum sustained winds of 50 mph. The system is moving to the west-northwest at 16 mph. The Storm could become a Category 4 hurricane/ Fox Weather says that it is too early to say if Lee will impact the U.S. East Coast. The FOX Forecast Center will continue to monitor Lee and provide any updates should there be any changes. Stay Tuned.
Natural Gas took a break as it was hoped the heat would ease. Yet the possibility of a bullish storage surprise is high as the market may be underestimating the demand during this recent heat blast. Credit must be given to US gas producers as one of the key reasons that at least electricity bills are staying somewhat under control. Another thing that can keep them under control is when the electricity providers do not overcharge.
Com Ed in Illinois has been at the forefront of recent scandals involving long-time Illinois state power broker Mike Madigan and now a new lawsuit has businesses and workers in Illinois wondering if the corruption will ever stop. Yet is this new allegation of them overcharging corruption or just a cost of doing business?
Crain's Chicago Business reports:
An association representing more than 120 corporations, including high-profile locally based heavyweights like drugmaker AbbVie (NYSE:ABBV) and agribusiness giant Archer Daniels Midland (NYSE:ADM), has filed with state regulators to overturn a Commonwealth Edison surcharge that they say is collectively costing them more than $100 million.
The Aug. 31 filing by the Chemical Industry Council of Illinois, along with several other individual companies and other institutional power consumers, takes aim at ComEd’s monthly charge gradually clawing back credits the utility provided customers last year and early this year under the Climate & Equitable Jobs Act (CEJA). Those credits, which turned out to be wildly and overly generous, were tied to payments under the 2021 clean-energy law that nuclear power generator Constellation Energy Group made to ComEd under provisions to bail out three nuke power plants in Illinois.
The law set a power price those facilities were to get from ComEd customers over a five-year period. Under CEJA, if market prices turn out higher than the bailout price, Constellation is to refund the difference, and ComEd customers get a credit on their bill. If lower, ComEd pays Constellation the difference and sends the bill to customers. ComEd ended up refunding $1.1 billion more than it should have in the year that began June 1, 2022. Beginning in June 2023, it now is recovering that amount and charging 5% interest to do so.
The industrial customers argue that the Illinois Commerce Commission didn’t follow CEJA in allowing ComEd to impose the surcharge without conducting a formal proceeding. The ICC voted instead in May to allow the surcharge to go forward without a review that would permit the involvement of outside parties.
They also argue that ComEd’s alleged mismanagement of the program should bar the utility from collecting the surcharge. They’re urging the commission to halt it and order refunds of what ComEd has collected since June. “The Chemical Industry Council of Illinois is filing this complaint because our members are being whipsawed by the huge increase in ComEd Carbon Free Resource Adjustment charges, which began in June 2023,” council CEO Mark Biel said in a release.
“We are convinced that these charges are unjustified and should be disallowed by the Illinois Commerce Commission.”
Let’s see how this plays out, but no wonder business and folks are fleeing Illinois.