The Phil Flynn Energy Report
Waiting On The World
Oil prices are playing the waiting game as the market awaits a decision from OPEC+ regarding how much supply they’ll add to the market. At the same time, questions remain as to whether or not Iranian barrels will ever come back to the market.
Behind the scenes, there was a little bit of drama yesterday as the Biden administration ordered attacks on Iranian militias by the Iraq-Syria border. This attack, of course, could further hold up the already-delayed Iranian nuclear agreement. Iran is refusing to allow inspectors in their nuclear facilities, as they’re being told that the agreement has expired. This will make it much harder for negotiators to come to a final resolution.
All of this drama overshadows the fact that global inventories are falling at a dramatic pace. For example, take a look at the private forecasters Genscape, who in their weekly reports showed another substantial 1.577 million-barrel drawdown in the Cushing, OK delivery point.
This is the same delivery point that people worried would overflow just a year ago; now, they’re afraid that draws could put Cushing, Oklahoma below their minimum operating levels in just a few weeks. This comes at a time when U.S. oil production is stagnating, shale producers aren’t spending money, and investors are turning away from traditional fossil fuel investment.
John Kemp at Reuters points out that while U.S. oil prices have climbed to the highest levels in roughly 3 years, the number of rigs drilling for oil is still less than half what it was the last time prices were at this level. This means that the shale cavalry isn’t going to come to the rescue of the global market and alleviate a potential shortage in the coming months and years. It also means that the U.S. is going to be more dependent on OPEC+ for its oil supplies.
Gasoline prices are still going up— in fact, we're hitting the highest levels of the summer. AAA puts the price of regular unleaded at a national average of 3.099 per gallon. The reopening of the economy is helping drive gasoline prices, but also, as we predicted, policies by the Biden administration are making the situation worse.
While the administration tries to show empathy for rising gasoline prices by demanding that there won’t be a gasoline tax to pay for Biden's infrastructure plan, his policies surrounding pipelines, drilling moratoriums, and commitments to the Paris Climate Accord will all result in higher fuel prices for Americans.
There’s also going to be a big impact on Americans when it comes to their heating bills. The drilling moratorium is creating a very tight supply of natural gas. When you add in the impact of a hot summer and record exports of liquefied natural gas, you create a situation in which this winter’s heating bills are going to be substantially higher than they were a year ago.
In all likelihood, the best way to trade energy right now is to buy breaks across the board. We expect another bullish drawdown in crude oil supplies this week and expect to see the demand for products soar. We're facing an environment in which we're going to see tighter supplies and higher demand unless there’s a breakthrough with the Iranian nuclear talks. The odds are still very high that we're going to see a significant move on oil prices to the upside.
We do have to acknowledge that the 4th of July holiday sometimes gives us a short-term peak, but it will in no way change the overall bullish fundamentals. This bull market is being built by the reluctance to invest more money in the oil and gas sector because of the concerns about climate change. We're going to start seeing the real cost of the energy transition and it's going to be coming out of our pockets.
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