The Phil Flynn Energy Report
What Sanctions?
Iran and China are opening, taunting the Biden administration as it openly flaunts oil sanctions on Iran, even as Iran raises its enrichment of uranium. Both China and Iran seem to think that the Biden administration will be too weak to call them out on these flagrant violations of U.S. sanctions.
Under President Trump, they weren’t as bold. China did try to sneak in Iranian oil, but was called out by the Trump administration, which slowed and eventually stopped almost all of China’s illicit oil imports.
Now, China and Iran think that it’s business as usual: because the Biden administration is begging Iran to rejoin the flawed Iranian nuclear deal, it seems they believe there won’t be any consequences from the U.S. The money Iran is getting is also empowering them to continue its military excursions in the Middle East and raising the risks of a conflict with Israel and Saudi Arabia.
Bloomberg News reported that “China is gorging on sanctioned Iranian oil— with imports forecast to more than double this month from February— as other countries hold off purchases for fear of incurring the wrath of the U.S.”
So, what they’re saying is that Iran and China, unlike other countries, aren’t worried about the Biden administration's wrath.
Bloomberg also writes that “Chinese imports of Iranian crude will rise to 856,000 barrels a day in March, the most in almost two years and up 129% from last month, according to Kevin Wright, a Singapore-based analyst with Kpler. His estimates include oil that’s undergone ship-to-ship transfers in the Middle East or in waters off Singapore, Malaysia and Indonesia to obscure their origin.”
Israel is signaling that they may be forced to act militarily if Iran doesn’t reverse their nuclear ambitions; just this weekend, Saudi Arabia was attacked by an Iranian-backed Houthi rebel that attempted a failed drone attack on a Saudi oil terminal, the largest in the world.
Iran seems to be getting out of the corner that the Trump administration had put them in. This is adding to the risk premium for oil. All oil traders know that the higher price for oil, the higher price for products— it’s oil economics 101.
The other driving force in the upward move in oil prices is OPEC+ production cuts. As we previously have noted, the Biden administration has been silent on the aggressive OPEC+ production cuts. We all remember that President Trump pushed OPEC+ to reverse course on production cuts, causing oil and gasoline prices to plummet. Who says that Presidents can’t have some impact on gasoline prices?
OPEC+ is now emboldened, and according to International Oil Daily:
Saudi Arabia enabled [OPEC+] to post the highest compliance rate so far with the oil production cuts it began implementing last May.
The Saudis lowered their production by 979,000 barrels per day [bpd] in February— roughly in line with their pledge to make an additional unilateral cut of 1 million [bpd]— according to Energy Intelligence's assessment. That enabled the Opec-plus producer alliance to reach its best-yet compliance rate of 112% for the month.
February was also the first month that Russia— the group's other heavyweight producer— played by the rules, falling short of its 9.184 million [bpd] output ceiling by 14,000 [bpd] and giving it a compliance rate of 101% for the month.
As a result of the unilateral Saudi reduction, Russia produced 1.03 million [bpd] more than the Saudis in February, even though the two had started the implementation of the agreement from an identical base of 11 million [bpd] and with an equal output cut of 1.88 million [bpd].
While oil prices whipsawed after the Energy Information Administration (EIA) status report at the end of the day, it was impossible to ignore the underlying bullish fundamentals of the market.
U.S. refinery runs are recovering very slowly from the Texas power outages as oil refinery inputs averaged 12.3 million barrels, up 2.4 million bpd more than the previous week’s average. Refineries operated at 69.0% of their operable capacity last week.
Weak oil runs and a jump in U.S. oil production to 10.5 million bpd led to a massive 13.8 million barrel crude oil build. Another jump in U.S. gasoline demand and distillate demand was offset by major drops in petroleum products.
The EIA said that total motor gasoline inventories decreased by 11.9 million barrels last week and are about 6% below the 5-year average for this time of year. Finished gasoline and blending components inventories both decreased last week.
Distillate fuel inventories decreased by 5.5 million barrels last week and are about 4% below the 5-year average for this time of year. Ready-to-use “gasoline” stocks fell 8.8 million barrels while gasoline demand increased by 762,00 bpd. Distillate demand was up 354,000 bpd.
Today we got the natural gas report. Dan Molinski at the Wall Street Journal says that the "U.S. government natural-gas data due Thursday are expected to show inventories decreased last week by less than normal for this time of year due to mild weather that weakened demand. The Energy Information Administration is expected to report gas-storage levels fell by 78 billion cubic feet [bcf] during the week ended March 5, according to the average forecast of 14 analysts, brokers, and traders surveyed by The Wall Street Journal. The EIA [released] its natural-gas storage data for the week at 10:30 a.m. ET Thursday."
Estimates ranged from decreases of 65 bcf to 86 bcf. The average forecast compares with a 72-bcf decrease in storage in the same week last year and a 5-year average decline of 89 bcf for that week. A 78-bcf decrease last week would mean gas stocks totaled 1.767 trillion cubic feet, 14% below last year's total at this time and 9% below the 5-year average for this time of year.
December and January saw a mix of warm and cold spurts that kept in check a long-running storage surplus compared with the 5-year average. However, a much colder-than-normal February caused demand to rise and supply to temporarily fall, which caused the storage surplus to vanish and become a deficit.
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