The global oil market became addicted to SPR oil and now it is addicted to Cushing, Oklahoma. The slapback from the SPR release is creating a squeeze on the US oil supply that is causing a front-month oil supply squeeze.
Of course, those who supported the SPR release are now blaming OPEC cuts for the shortfall but that ignores the fact that their response is payback for Biden’s manipulation of the market. Biden declared an oil war on Saudi Arabia, and he is losing.
The crude curve is going parabolic, backwardation speaking, and could cause a run on the bank at the Cushing, Oklahoma delivery point. Cushing’s levels have tumbled to just under 22 million barrels, down by the same amount since June, and are coming close to minimum operating levels. When Cushing runs dry, the WTI squeeze is already on.
There is some speculation overnight that perhaps Saudi Arabia will relent when it comes to their production cuts. I don’t think that’s a realistic possibility right now. The reality is that Saudi Arabia wants to regain control of the global oil market that they feel was unfairly manipulated by the Biden administration. Now with many companies believing that $100 a barrel of oil won’t hurt demand, there are increasing odds that we will get to that area.
Overnight oil tested the key resistance area that I talked about at $95 a barrel after the incredible run-up that we had yesterday so a bit of a pullback is to be expected. But if you look at the big picture, a breakthrough of 95 targets well into the $111 a barrel area.
This comes after the EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.2 million barrels from the previous week. At 416.3 million barrels, U.S. crude oil inventories are about 4% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.0 million barrels from last week and are about 2% below the five-year average for this time of year.
Distillate fuel inventories increased by 0.4 million barrels last week and are about 13% below the five-year average for this time of year.
Total product demand supplied over the last four-week period averaged 20.6 million barrels a day, up by 4.2% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 8.7 million barrels a day, up by 0.8% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels a day over the past four weeks, up by 8.6% from the same period last year. Jet fuel product supplied was up 9.9% compared with the same four-week period last year.
Could the basis of natural gas start to bankrupt some natural gas producers? John Moran pointed out either the basis and natural gas go down or the price goes up soon or you’ll see a lot of natural gas companies start to go bankrupt. If you look at the basis in October, it was $1.67 that leaves nothing for natural gas operations especially if you don’t own your own gathering systems most gathering is 35 to $0.53 per MCF it’s a disaster for these smaller companies. This could become a big problem once these companies’ hedges start to roll off. He worries that any company that has leverage could fail quickly.
He pointed out this week that gas was selling at $0.71 MCF out of the field due to the basis if you subtract $0.35 for gathering and you have a 36 cents MCF to pay all leasehold and operating expenses then you start to see companies start to have big problems. He says there is never been so high of a basis in the field and this is not making any sense.
Obviously, if natural gas companies start to fail then the record production that we’ve been seeing here in the United States from natural gas will start to falter. The problem is that the market is counting on record natural gas production in the United States to continue and if it doesn’t happen, get ready for another natural gas price shock somewhere down the road.