There were a lot of superlatives in the Energy Information Administration (EIA) Status report this week. The EIA reported that U.S. crude exports hit a record high. On the other hand, net crude imports were the lowest in history. Gasoline imports into the Gulf of Mexico hit zero for the first time since November 2020. US SPR crude stocks fell to the lowest level since 1984. Crude stocks did reach their highest level since July of 2021 but are still 2% below the average for this time of year.
The Energy Department, meanwhile, estimates there’s only enough diesel available now to satisfy about 25 days’ worth of demand. Brian Deese, the director of the National Economic Council, told Bloomberg that supplies were “dangerously low,” a term we used weeks ago.
The EIA said distillate fuel includes heating oil inventories and is about 20% below the five-year average for this time of year. Drilled but uncompleted wells have hit the lowest level since 2013 and the Energy Information Administration confirms what we have been saying that this means that U.S. oil production is going to struggle. The EIA said that more wells were completed than were drilled in the United States from July 2020 through September 2022 (the latest month for which data are available). As a result, the number of drilled but uncompleted wells (DUCs) in the United States fell to 4,333 as of September 2022, the fewest since at least December 2013, when we started estimating the number of DUCs. Fewer DUCs and natural gas pipeline constraints could limit future U.S. crude oil production growth.
Not only do we have a situation where we’re facing tight supplies of almost everything petroleum across the board, but we’re also adding to the upside risk factor of these prices because of geopolitical war premiums. When Biden was elected, he suggested that when it came to foreign policies that the “adults were back in the room.” Yet it is Saudi Arabia that suggests that the Biden administration’s foreign policy is actually the opposite. Biden’s policy of being tough on Saudi Arabia and the United Arab Emirates in the first year of their administration tried to make them a ‘pariah state’, then later begged them for more oil and pouted when the Saudis didn’t do their bidding. Energy Minister Prince Abdulaziz bin Salman said, “We, as Saudi Arabia, decided to be the mature guys,” at the Future Investment Initiative conference in Riyadh on Tuesday.
The White House did not appreciate those comments. John Kirby (NYSE:KEX), the White House communications coordinator, said, “It’s not like some high school romance here.” Then he went on to blister Saudi Arabia with more tough talk, saying that Saudi actions {support} Ukraine are insufficient to compensate for the OPEC plus decision to cut production. It seems like there are hard feelings with the Secretary of State Anthony Blinken as well as the Biden administration for not putting more fossil fuels into the atmosphere.
But it’s not only in Saudi Arabia diplomacy the Biden administration seems to be failing. Diplomacy failed to stop the war in Ukraine, and the risk of a nuclear confrontation is rising. Our relationships with China have deteriorated, and the Biden administration still comes off as a spoiled child when it comes to diplomacy. Perhaps the Biden administration should take the same advice from perhaps the greatest diplomat in United States history, Benjamin Franklin, who said to somewhat hotheaded John Adams when he said, “diplomacy is seduction in another guise, Mr. Adams. One improves with practice.” I think everyone, no matter their party, realizes that the Biden administration could do a lot better with global diplomacy.
Reality is setting in on the petroleum side of the market. The oil market has been held back by fears of fed policy in recent weeks and a strong dollar. Now that the dollar is showing some signs of pulling back and winter is right around the corner, the reality of the fact is that global demand versus global production is at the tightest level we’ve seen going into winter for a very long time. Because of that, there are significant upside risks. We have also been warning for months about the impending diesel squeeze, and we continue to tell people to stay hedged because of that upside risk. To be honest with you, I still believe that there could be significant upside risk in the heating oil market if we have a cold winter. Hedging is very important.
The recent big, sharp sell-off in natural gas is due to a combination of factors such as mild weather and record production increases. Also, we have seen maintenance, both planned and unplanned, for LNG export terminals. There seems to be a growing sense in the market that you don’t need to be hedged. Don’t be fooled. This is not the time to be complacent. In this market, if we get a warm winter, we might not get the price spike that I expect. The risks are very high that if we do, prices will exceed what we have seen earlier this year.
John Kemp at Reuters is making the same warning about Europe to not be too complacent. He writes in a must-read,” Mission accomplished? Europe fills gas storage ahead of schedule. “Northwest Europe has experienced much warmer than normal temperatures since early October, delaying the onset of the heating season and ensuring gas storage is near maximum levels ahead of the winter. He says that:
“This year’s storage refill has been the fastest ever, as the region has paid any price to amass inventories and protect itself from a possible disruption of pipeline supplies from Russia."
Yet after a lot of detail, he concludes that:
“If the peak consumption season proves colder than currently forecast, significant reductions in demand will still be needed to preserve stocks for the end of winter.”