The Phil Flynn Energy Report
Nuclear Talks on Hold
Iranian nuclear talks are being put on hold as Iran has a new president-elect hardliner, Ebrahim Raisi.
The U.S. has sanctioned Raisi before because of his involvement in the mass execution of thousands of political prisoners in 1988. He gave a speech this morning and called on the U.S. to return to the nuclear deal in full compliance. He’s also saying that the European Union has failed to meet its obligation under the JCPOA deal.
The JCPOA talks broke down over the weekend, yet some diplomats said that there was some progress made; for example, progress on which sanctions could potentially be removed if there were a deal. The truth is, the election of Raisi makes it almost impossible to get a deal done.
According to the New York Times, Ebrahim Raisi said that “Regional issues and missiles are not negotiable,” he said, adding that the United States had not carried through on issues it had “negotiated, agreed and committed to.”
He also says he will refuse to meet with President Biden.
Raisi’s ascent to power is a sign that Iran is moving further away from international norms and instead is going to adopt a more aggressive approach in global affairs.
Yet, Iran somehow believes that a deal is still going to be made. Reuters is reporting that Iran could quickly export millions of barrels of oil that it’s holding in storage if a deal is reached and sanctions are lifted on their oil exports. The report suggests that if sanctions are lifted, Iran could export an extra 1,000,000 barrels of oil per day, or 1% of the global supply, for months. Reuters says that they have nearly 60 million barrels of crude oil in inventory, 30 to 35 million of which that’s been built up during the last 2 years.
The way the global demand for oil and other energy products is growing right now, perhaps if Iran's oil does return to the market, it will be sorely needed. There are more concerns about global spare production capacity and, because of the movement away from traditional fossil fuels, we’ve seen a historic drop in investment that’s going to leave the world undersupplied.
In an opinion piece by Julian Lee of Bloomberg News, he says that he believes that 10 OPEC+ countries' spare capacity is at 7.75 million barrels per day (bpd). That’s a far cry from the 5.8 million bpd that the OPEC+ group claims to have. I believe it likely means that once the economy starts revving up, we're going to have a very difficult time meeting demand.
One would’ve expected the U.S. energy sector to make up the difference. In the last few years, people used to gush about how the U.S. shale producers would keep oil prices low forever. Then anytime oil prices rose to a certain price point, U.S. shale producers would raise production and flood the market with oil.
Now OPEC+ itself is downplaying the ability of the shale producers to come back because they can't do it without the funding. The demonization of fossil fuels by the Biden administration has led to a major change in the way global capital moves. Billions of dollars that normally would be invested in fossil fuels are being diverted elsewhere, and because of that, we aren’t seeing enough increases in production to offset the decline rate of existing wells.
On Friday, the U.S. oil rig count rose by 8 rigs to 373, and while that’s up 201 from the cyclical low and last August, it’s still less than half the number of oil rigs that we had to work with the last time oil was at $70.00 a barrel, according to Reuters. Because of that, don’t look for certain U.S. oil production or gas production, as U.S. production is going to struggle.
It's not just oil, but it's natural gas, as well. The U.S. has given up its title as the world's biggest natural gas producer and, according to the Wall Street Journal, power plants are paying twice the cost of last summer for natural gas, which means we're all going to be paying higher utility bills and see increasing manufacturing costs.
The Wall Street Journal says, “Demand for the fuel is picking up as the world’s economies reopen and as Americans dial down their thermostats for what is expected to be a hot summer. Meanwhile, U.S. producers have stuck to the skimpy drilling plans they sketched out when prices were lower, eliminating the glut that was keeping them depressed.”
The Journal says that if higher prices persist, Americans can expect bigger utility bills. The work-from-home class could feel a pinch from pandemic-shifted energy costs, as employers and employees now have to heat and cool their home offices and run electronics when they would normally be at work.
“These are the consequences of the underinvestment we’ve seen in natural gas,” said Colin Fenton, chairman of investment banking at Houston’s Tudor, Pickering, Holt & Co. “What’s notable is these prices are happening with industrial demand, more than a quarter of the market, so early in its recovery.”
There are plenty of warning signs. The gasoline market and refining capacity also foretell of a potential energy crisis as we forge ahead. The Biden administration is going to have to face the reality that we’ll continue to need fossil fuels for the foreseeable future. The administration must also acknowledge that natural gas is likely a fantastic bridge to carry us over to a point where we can get to a more carbon-neutral world. Right now, the Biden administration's drilling moratoriums, along with their disdain for pipelines and other fossil fuel production, means it will be almost impossible to meet that demand.
China may try to cool commodity prices, but it's going to be a tough job. Javier Blass of Bloomberg tweeted this morning that “China has issued the 2nd batch of oil import quotas for private refiners (the so-called teapots), significantly lower than the 2nd batch of 2020 (a 35% [YOY] reduction). Beijing is cracking down on the teapot's excesses.”
The trend for oil is still very strong to the upside and we still recommend buying breaks in this market. We continue to believe that there’s upside risk in this market and we continue to warn people who have the exposure that they should have some hedges in place.
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