The oil market was trying to get its hands around the impact of Israel’s military operation in Gaza against a backdrop warning from a Chevron (NYSE:CVX) CEO about upside risk to the price of oil when Russia’s Alexander Novak seemed to pull cold water on one of the bullish oil market narratives.
Oil rose as Israeli forces took control of the Palestinian side of Rafah crossing in Gaza but was subdued as the operation looked very targeted and professional. That was after a desperate attempt by Hamas to try to convince the world that they have accepted the ceasefire proposal from Israel the only problem is that was not the ceasefire proposal that Israel offered.
While all the signs were pointing towards the fact that OPEC plus Russia was going to not only to follow through with their production 2.2 million barrel a day production cut into the end of the year possibly talk about extending those cuts into the New Year It was supposed to be augmented with makeup cuts from the producers like Kazakhstan and Iraq that had overproduced.
And instead of that tidy little narrative, overnight Russian Novak talked about the possibility of increasing oil production.
Novak suggested that under the OPEC deal, it may still be possible to increase oil production. He suggested that no deal has been agreed to and it’s still being analyzed by Russia.
Russia’s Novak of course has always played” bad cop” going into these OPEC+ meetings. Disagreement on production cuts years ago between OPEC and Russia was one of the reasons why they had a production war which eventually caused oil prices to crash to below zero. Novak said that “There is no need to predict further OPEC+ steps, we must look at the market.
And right now, based on the way the markets have been acting, OPEC needs to act as it seems like the market is less concerned about tight supply than it was just a few weeks ago.
Surprise increases in U.S. oil supplies and a drop in US exports suggest that perhaps global demand isn’t as strong as it should be.
John Kemp at Reuters points out that went through the wells calendar spreads have narrowed sharply over the last month in other words flipping from concerns about undersupply to supply so it will be more comfortable in the second half of the year.
If that is the case, then OPEC needs to show solidarity and continue along with their production cuts in Russia’s gentle threat that they could increase oil production is one of the reasons why oil prices have given up some of its gains overnight.
My take on this story from Russia is that it’s just typical pre-OPEC meeting positioning. I think OPEC plus Russia is gonna speak loud and strong because they don’t want to give up the dominance that they have achieved in securing its market share, While there are definitely some issues as far as producers that want to produce more that they will have to deal with I think that will be a problem for next year. I think the entire group realizes that they need to stick together, and they will probably achieve their objective of reducing global supplies in the next couple of months. That means that you should be prepared for upside price risks going forward,
As far as the geopolitical risk factors Biden administration as saying that, if need be, they will be able to tap the Strategic Petroleum Reserve even though they have taken steps to drain it down to its lowest levels in decades. President Joe Biden’s energy adviser Amos Hochstein said on Monday that the U.S. has sufficient supply of oil in the Strategic Petroleum Reserve to address any supply concerns and is monitoring markets on how to use it.
From a technical area of the market still looks extremely oversold at this point and more than likely as close to a bottom seasonal demand should pick up and it’s very clear that the Energy Information Administration has consistently underestimated demand for both gasoline and diesel.
This comes as the CEO of Chevron Mike Wirth is reiterating his warning that there are significant upside price risks to oil.
He also said that natural gas demand will rise on electricity consumption from data centers. He says that Wind and solar still face challenges meeting peak demand due their reliance on variable weather.
He says that reliable baseload power is needed to support renewables and natural gas is the most likely source, he said.
Remember how Transportation Secretary Pete Buttigieg was telling us what a great deal electric car were? Remember how he seemed to blame everybody for not buying that electric car when gasoline prices went up.
I assume he was talking about getting away from some of those gasoline taxes that the federal government collects or perhaps the state government collects, where the local government collects. Well, now it appears that governments across the globe now want the drivers of electric cars to pay their fair share.
The Financial Times reports that ‘Global policymakers are imposing new taxes on electric vehicles as the shift away from combustion engines threatens to leave a $110bn hole in government revenues owing to a drop in receipts from fuel duties.” So the old adage remains, If you build it! They will tax it!
The UK, New Zealand, Israel and the majority of US states are among jurisdictions introducing tax changes and charges on EVs and hybrid vehicles designed to raise funds and compensate for declines in petrol and diesel excise taxes. The measures are varied, running from registration fees to road usage charges based on mileage and taxes on public charging points. EV owners and green campaigners say they will slow society’s switch from gas-guzzling vehicles to lower-emissions alternatives.”
Reuters is reporting that oil output at Kazakhstan’s giant oilfield Tengiz, operated by Chevron-led CVX.N Tengizchevroil, declined by 25% over May 1-5 from April’s average level to 474,000 barrels per day (bpd), a source familiar with the data told Reuters on Monday.
Natural Gas is rising as US production is falling and demand is rising. Nat gas production in the US fell to 96.9 in May down from 98.1 in April. Increased flows to Freeport and Delays in Cheniere maintenance is helping reduce the Nat gas glut. The long-term outlook for gas is getting stronger as green energy realities are sinking in.
Oil Price reports that Back in January, Cheniere predicted that China’s demand for LNG exports could double over the next decade, as reported by the South China Morning Post (SCMP). In the U.S., electricity demand is expected to soar by up to 20% by 2030, based on April data from Wells Fargo, with natural gas demand potentially increasing by 10 billion cubic feet per day as a result. Additionally, Goldman Sachs predicts that natural gas will account for 60% of new electricity demand from data centers, compared to the estimated 40% market share for renewables, with gas pipeline operators to benefit significantly.