The Phil Flynn Energy Report
Oil Policy Madness
Oil prices are waking up to the reality that underinvestment and Biden’s fixation on climate change leadership will leave the globe undersupplied with oil and gas. The market’s starting to price in a possible energy crisis and the future impact that it’ll have on people's lives and economic growth.
On Tuesday, Joe Biden held the first bilateral meeting of his presidency with Canadian Prime Minister Justin Trudeau, where he stated the U.S. would lead on climate change and set an example. Yet, we know that such an example will come at the expense of American workers and will favor China, who continues to massively expand its use of fossil fuels as the U.S. goes into retreat.
Biden will also keep pressure on the U.S. shale industry, which is already under pressure from a year of weak prices, lack of capital investment, and the fear of frivolous lawsuits from governments and municipalities surrounding climate change.
For example, The Hill reported that city officials in Annapolis, Maryland “filed a lawsuit Monday accusing 26 companies, including Exxon, Shell, and the American Petroleum Institute, of failing to warn state officials about the dangers posed by man-made climate change. The lawsuit, filed in Anne Arundel County Circuit Court, alleges that the named companies knew ‘for decades that climate change impacts could be catastrophic, and that only a narrow window existed to take action before the consequences would be irreversible,’ yet failed to warn relevant state officials.”
Also, the Texas energy crisis may permanently cut a portion of U.S. shale production for the foreseeable future. Oil trader Trafigura says that they believe that 5 to 10% of our oil production that was shut down due to the crisis may not come back online ever. They also predict a permanent loss of 2.0 million to 2.5 million barrels of U.S. refining capacity. That means average Americans and businesses will likely be facing sharply higher gasoline and energy prices.
The American Petroleum Institute hasn’t yet shown the full impact of the Texas disaster. The API reported a surprise 1.026 million barrel increase in crude supply. Part of that increase was a sharp rebound of 2.783 million barrels in the Cushing, Oklahoma hub.
The APOI did show a very large 4.489 million barrel drop in distillate and a modest 66,000 barrel increase in gasoline supply. The market initially sold off at the number but is now rebounding because the trade knows that in the coming weeks we’ll start to see the impact of the production and refining shutdowns.
Oil is testing its major long-term resistance near $63 per barrel. A breach of that number should open up a long-term oil market break out. I’ve been warning that when oil prices were cheap we were setting the stage for this burgeoning oil supercycle. People who thought that oil supercycles would be impossible in the future because of shale are getting a lesson in the importance of oil investment as well as government policy!
The Biden administration’s plan to make oil and gasoline expensive and scarce is ahead of schedule. The problem is that it’s weighing on the back of the American worker: it’s coming at the expense of U.S. opportunity and jobs and it’s a policy that is going to give China back an economic edge. U.S. manufacturing will be strained in the coming months, but China’s will expand using good, old-fashion fossil fuels.
Hopefully, you’ve headed my warnings and you're hedged. On the bright side, there will be some amazing opportunities in the commodity space. The risk for another upside spike is still high. We’re still in a “buy the breaks” mode. Call if you need help.
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