Get ready to pay up. As we predicted, the second half of the year in the global petroleum markets will look much different than the first half as the market is now facing up to some crude realities. After the end of SPR releases and recession fears and a liquidity drain due to bank stability fears which caused the markets to ignore a looming supply squeeze, the coming supply deficits are getting too big to ignore.
Not only did the month of July have its best monthly gain since January of 2022 with five weeks of consecutive gains, but we are also seeing gasoline pump prices hit the highest level of the year. Prices according to AAA, for gasoline hit $3.757 a gallon up 21.4 cents from the beginning of the month when many people thought they had hit a peak.
While the market fretted about Fed interest rate hikes and bank failures, they failed to keep an eye on demand which according to the latest data from JODI, increased by 3 million barrels a day near the record high they are recording in March. The month-on-month gain was driven by China, India, Saudi Arabia, and the US.
Goldman Sachs also shows that global oil demand hit a record high. Reuters reported that “The bank estimated that global oil demand rose to a record 102.8 million BPD in July, and it revised up 2023 demand by about 550,000 BPD on stronger economic growth estimates in India and the U.S., offsetting a downgrade for China’s consumption."
Saudi Arabia is going to dig in its heels by entering its extra 1 million barrel-a-day production cut for another month, as the US rig count continues to fall. According to Baker Hughes, the rig count fell by 1 rig to 529 rigs and gas rigs fell by 3 to 128 causing the US rig count to fall to 103 fewer active rigs than a year ago, which will force the Biden administration to produce a new narrative as the country will face another winter oil and gasoline price spike as the potential global oil supply drain, unlike anything we have seen in decades.
Biden is already trying to change the energy narrative by saying that high energy prices are expected as part of the energy transition. CNN reported that the White House is watching rising gas prices “very carefully,” as Joe Biden’s top advisers are briefing him regularly on the situation, a senior administration official told CNN. At present, top advisers to Biden believe the situation is steady, the official said, considering it’s the height of air conditioning and driving season and given the strength of the economy, which drives up demand for travel and energy usage. “The irony is the strength of the economy brings higher prices,” the official told CNN. “The better the president (and his agenda) performs, the higher the price is going to go.”
So, the spin is that high gasoline prices are good for you because the economy is growing. That is going to be a tough sell to the American people many of whom have never seen inflation like that last few years in their lifetimes. While there is some truth in the logic that strong demand for oil and gas and a strong economy do raise prices, it does not explain the impact of his bazaar war on the US oil and gas industry that could allow for more oil production and a more orderly increase in prices. Instead because of an ill-advised release from the SPR and bad energy policy, Americans have to get prepared for another gas price shock.
I’m sure the Biden team will take no responsibility for this coming disaster and once again blame the US oil and gas companies and US oil workers and fail to acknowledge that his political vendetta against the industry is taking its toll. Biden’s killing of the Keystone pipeline, drilling moratoriums, and push against fossil fuel investment and the embracing of Karl Marx-inspired ESG regulations and even spending taxpayer’s money to help groups sue the US oil and gas industry has reduced US oil production at least by 3 million barrels a day.
The Hill reported that “The Biden White House is proud to squash domestic oil and gas development. The New York Times reported that the Interior Department “characterize(s) the changes as part of a broader shift at the federal agency as it seeks to address climate change by expanding renewable energy on public land and in federal waters while making it more expensive for private companies to drill on public lands.” Of course, when they make it more expensive to drill on public land it makes it more expensive for you and people on fixed incomes to pay their gas and electricity bills. It will also put another upward pressure on inflation and that will force the Fed to again raise interest rates and reduce the chances that many Americans must buy that first home. The plan is working and with the SPR drained to the lowest level since 2013 and only 18 days of demand cover in the SPR, would make it totally irresponsible for the Biden team to tap the reserve again. And as far as sanctions on Russia, well they do not seem to be working.
Bloomberg reports that “Russia’s oil firms are setting a record pace in their drilling this year, even as the country has agreed with OPEC+ to make longer production cuts. Rigs drilled 14.7 thousand kilometres of production wells in Russia from January to June, 6.6% more than planned and 8.6% more than the same period in 2022, according to data seen by Bloomberg. Last year “saw a post-Soviet production-drilling record, and given the data I now expect a new high to be established,” said Ronald Smith, an oil and gas analyst at Moscow-based BCS Global Markets. Russian oil firms accelerated their drilling even as the Kremlin ordered them to cut production by 500,000 barrels a day, initially for just a few months in retaliation for Western sanctions over Ukraine, and subsequently until the end of 2024 in coordination with allies in the Organization of Petroleum Exporting Countries.”
One of Biden’s biggest mistakes was to bet against the US oil and gas industry and the US oil and gas worker. The US oil and gas industry is the cleanest most efficient in the world yet they continue to get penalized by the Biden administration because of a political vendetta. What he doesn’t realize is his green energy policies have made the world a much dirtier place as we become more reliant on fossil fuels from other parts of the world. We’ve actually seen an increase in global coal consumption because of the policies he’s put in place and it shows that somehow the road to Hades is paved with good intentions.
We still believe there are big problems ahead and we need to be hedged against the possibility of major price spikes. We can only hope that there are no global market disruptions. Already we’ve seen what a few refinery outages can do to gasoline prices, and we could see a spike in diesel prices as well as crack spreads that are continuing to be on the rise and we should be prepared for more price volatility.
EBW Analytics says that the natural gas falters despite the scorching heat. The August contract fell 23.8¢ (-10%) over the last two trading sessions into a final settlement, pulling the NYMEX forward curve lower. Notably, pricing declined despite both a third-consecutive bullish EIA storage report and one of the hottest days in US history on Friday. Despite soaring power burns, however, Henry Hub cash pricing for Friday changed hands below $2.50/MMBtu. Enduringly weak physical pricing, due to towering storage surpluses and soft LNG feed gas demand, continues to impede near-term upside potential for natural gas according to EBW.
We still like to be long and hedged with options.