The risk in the global energy markets is rising. The markets face a looming supply shortage as OPEC raises their global demand forecast to a record high of 2.44 million barrels a day which was double the demand growth from the International Energy Agency (IEA). Tensions in Libya have cut supply. Yet it is Biden’s war with Russia in Ukraine that seems to be adding a new level of unnecessary risk.
As oil prices surge above the $60.00 barrel G-7 price cap, which is risking a cut off of Russian oil supply, Biden is looking to up US involvement in the Russian-Ukraine war.
Biden should own this war because he has spent at least 78 billion dollars for this war and that cost is rising. Days after vowing to be with Ukraine for as long as it takes, Biden is ordering the Selected Reserve to be ready for active duty. Biden said in an order, “I hereby determine that it is necessary to augment the active Armed Forces of the United States for the effective conduct of Operation Atlantic Resolve in and around the United States European Command’s area of responsibility.” This is a new level of US involvement in a war that Biden said yesterday that the Russians have no way of winning. In fact, he said Russia already lost the war and if that is the case then why is he ordering the selective reserve to be ready for active duty? Why is he sending cluster bombs, banned in over 100 countries, that many find inhumane and morally objectionable? Bombs where deadly cluster submunitions could lie dormant many decades after their use. Seems like overkill for a war that has already been won.
This comes as oil prices surge above the $60.00 a barrel G-7 price cap, which is risking a cut off of Russian oil supply. Markets in Europe are experiencing supply tightness and the increased presence of US military personnel in Europe is not going to increase the confidence in Russian oil supply. This comes as Reuters reports that, “Russian oil exports from western ports are set to fall by some 100,000-200,000 barrels per day next month from July levels, a sign Moscow is making good on its pledge for fresh supply cuts in tandem with OPEC leader Saudi Arabia, two sources said on Friday, citing export plans. Kepler says that some Russian crude transport is unlikely to be impeded as supply to key buyer India is largely insured by non-Western providers and overwhelmingly carried on Russia’s own fleet. Reuters reported, “Indian refiners have settled some payments for Russian oil imports in Chinese yuan, but the U.S. dollar remains the dominant currency for such payments, a senior government official said."
For Saudi Arabia and Russia, this is payback, and they are going to do what they can to tighten the market. Today OPEC plus Russia scheduled their online monitoring meeting on August 3rd. It is unlikely at this point that they have any inclination to change their policies. The big question is whether Saudi Arabia will make permanent their lollipop production cut. That lollipop production cut made Russia the biggest producer in OPEC. So, it seems that the war in Ukraine, while some argue has hurt Russian oil revenue, I would argue but they seem to be doing just fine, especially by selling more oil.
Oil is also getting more support from turmoil in Libya. Yesterday oil prices surged when protests shut down some of Libya’s oil production. Quantum Commodity Intelligence reported that protests at several oilfields in Libya have threatened to shut in up to 370,000 bpd of crude oil production. The problem with these uprisings in Libya is you do not know if it’s going to end in 24 hours or if it’s going to spread. In the past, militant groups in Libya have fought over the oil supplies and that kept supply offline for a long period of time. All factors have a vested interest in getting supply back into the market because they need the money. Still, we must watch this because if Libyan oil supply is down for an extended period of time, it’s another major hit to the global oil supplies.
As we have said before, the oil market has been sleepwalking into a potential energy price shock. Every reporting agency, whether it be OPEC, the International Energy Agency and the Energy Information Administration sees a supply deficit this year. The markets’ complacency might be attributed to excessive pessimism about the impact of rising interest rates on crude oil demand but also because the market was drunk with Strategic Petroleum Reserve barrels that they fail to realize were temporary and would have to be replaced. Impact from ESG investment and bad energy policy is going to bite the market. We think the upside risks in the market that have been held back by a warmer-than-expected winter, concerns about rising interest rates as well as bank failure concerns are switching over to the reality that the demand for oil is going to outstrip supply. The Phil Flynn Energy Report has continued to hold this projection and it may get worse. The markets’ seemingly short-sighted focus and the potential for a recession did not adequately price in the upside risks. Banking failures that drain the liquidity from the oil futures market have subsided somewhat and that could mean that we will see a more solid rally over the next few months.
The heat is on but the wind ain’t blowing. The Energy Information Administration reported the injection of 49 BCF into storage for natural gas and that was less than market expectations. Part of the reason is we’re seeing strong demand from the heat wave in Texas, but the wind isn’t blowing so the generation from wind seems to be subpar. Stocks were 569 Bcf higher than last year at this time and 364 Bcf above the five-year average of 2,566 Bcf. At 2,930 Bcf, total working gas is within the five-year historical range.