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Oil Hokey Pokey

The PRICE Futures Group - Fri May 12, 8:46AM CDT

You put that oil in, you take the oil out, you put the oil in and you shake all about. You do the hokey pokey and you turn yourself around because that’s what it’s all about. The Biden administration's laughable and economically dangerous energy policy took another strange turn against a backdrop of an oil market that is worried about the stability of the banking sector while Fed officials give speeches surrounding the economic risk of climate change. The Federal Reserve, because of pressure from the Biden administration, had directed the nation’s six largest banks to show plans for how they would respond to climate-related events. US Energy Secretary Jennifer Granholm who provides the comic relief for this administration's dark energy policy gave traders a smile when she announced that the Biden administration will seek to purchase oil for the Strategic Petroleum Reserve as soon as they end the Congressionally mandated sales in June.

Now we all understand the law is the law and the government agreed to sell oil in a budget deal but it raises questions as to why the Biden team would signal a purchase ahead of time thereby giving up any hope that they could buy the oil cheaper. What happened to their desire to buy oil for the reserve when the price fell below $70 a barrel. They missed that opportunity. The same way the US missed an opportunity to buy oil for the reserve at $22 a barrel but was thwarted by democrats because as Senator Chuck Schumer said, they did not want to bail out the US energy industry or their workers. I guess they’d much rather help Russia, Iran and Venezuela’s oil industry. We know that Biden's SPR releases were a big boom to China and India which soaked up record amounts of US taxpayer paid for US Strategic supply.

This comes as countries laugh off US sanctions as they view the Biden Team as paper tigers. For example, today Treasury Secretary Janet Yellen and German Finance Minister Christian Lindner are meeting to discuss the failure of the sanctions on Russian oil. Not only is Russia exporting more oil than they were before the sanctions, there are reports of countries in Europe ignoring the price cap, importing Russian oil from tankers that disguise its origin. Besides, Russian oil is being imported into places like India then being refined and exported to the US and Europe. The German finance Minister also said that he hoped that politicians in the United States would come to a “grown up” decision to raise the federal debt ceiling.

He is correct but it is very difficult to have a grown-up conversation with Joe Biden as he hides in his basement and from the press for months saying he will refuse to negotiate. Then when he finally meets with the opposition House Speake McCarthy, the Biden team did no homework at all and was not prepared for the talks.  

Iran has been laughing off U.S. oil sanctions since Biden came into office. In fact, that lack of respect for the Biden team has caused movement between Iraq and Iran to work more closely together on oil and gas projects. Zero Hedge reports that Iran and Iraq signed an agreement on Wednesday to expand energy ties and establish a joint office aimed at overlooking cooperation between the two countries, the Iraqi Oil Ministry announced, coming as part of Iranian Oil Minister Javad Owji’s visit to Baghdad. Upon arriving in the Iraqi capital, Owji was received by Prime Minister Mohammed Shia al-Sudani and discussed with him “the overall cooperation between Iraq and Iran, and ways to develop them,” as well as the ability to jointly confront “global economic challenges.” Which means that both Iraq and Iran are going to be ignoring sanctions that the Biden administration is supposed to be enforcing.

Of course, we all know with what's going on at the border, the Biden administration doesn't do a good job of enforcing laws that they don't happen to like. They are very good at using their Justice Department to go after their political enemies but not so good in going after alleged crimes for people close to his administration.

Bloomberg News is reporting that, "The European Union has proposed formalizing a halt of piped Russian oil flows to Germany and Poland. The two nations have been allowed under a derogation of EU sanctions to continue receiving oil through the northern section of the Druzhba pipeline. Despite that, both already stopped taking crude via the link, making good on earlier pledges to scale back. The news is supportive to the complex.

Yet behind the drama, the instability created by the Biden administration over the debt ceiling which they appear to be trying to play with for political purposes as well as the instability in the banking sector, is weighing on the price of oil. Yesterday that turmoil that pressured oil was due to of the massive drop in PACWEST Bancorp shares. When the bank reported on the outflows of capital, it raised concerns about the ability of that bank to avoid a failure.

Those concerns offset reports that global oil demand is going to be better than expected. Reuters reported that, "OPEC on Thursday further raised its forecast for Chinese oil demand growth in 2023 following the relaxation of the country's COVID-19 curbs, although it left the global total steady citing potential downside risks for growth in other regions. World oil demand in 2023 will rise by 2.33 million barrels per day (bpd), or 2.3%, the Organization of the Petroleum Exporting Countries said in a monthly report. This was virtually unchanged from 2.32 million bpd forecast last month. “Minor upward adjustments were made due to the better-than-expected performance in China’s economy, while other regions are expected to see slight declines, due to economic challenges that are likely to weigh on oil demand,” OPEC said in the report. "As further debt-related challenges may arise, geopolitical uncertainties persist, and inflation continues. In addition, the U.S. debt ceiling issue has so far not been resolved, a matter that could have economic consequences," OPEC said in its economic commentary.

That report comes as we are seeing more signs that both OPEC and Russia plan to comply with their agreed upon production cuts. Russia's liquids production in March decreased by 282 tb/d to average 11.1 mb/d. This includes 9.7 mb/d of crude oil and 1.4 mb/d of NGLs and condensate according to the OPECE Secretariat.

Yet the Biden Team that can’t even prepare for debt ceiling talk, is continuing to push its climate agenda even as they are way underestimating the cost and over estimating is positive impact on the planet. The latest concern about the astronomical cost of Bidens push for electric cars and natural gas heat and stove bans comes from oil price.

Haley Zaremba of Oil Price writes that, “In order to keep up with the expansion of renewable energy production capacity, the United States will have to more than double the current size of the electric grid. Stimulus from both the public and private sectors are hitting their intended mark, and the clean energy sector is booming. However, much of the potential environmental benefits of electrification will be completely wasted if we don’t have the power lines and grid capacity to transmit that power from where it's being produced to where the demand is concentrated. Meeting global climate goals requires a rapid and massive expansion of renewable energy production capacity. The urgency of this imperative is difficult to overstate; indeed, the United Nations has announced a code red for humanity. Building sufficient wind and solar farms to power the clean energy transition will require overcoming three major hurdles: finding enough land at an affordable price, building up the power grid to support the influx of electricity, and fixing the archaic and inefficient permitting process that governs these processes. 

Mass-scale solar and wind farms require a whole lot of land, which means that these projects are increasingly pushing into rural areas where they often are not wanted. “Utility-scale solar and wind farms require at least ten times as much space per unit of power as coal- or natural gas–fired power plants, including the land used to produce and transport the fossil fuels,” McKinsey recently reported. “Wind turbines are often placed half a mile apart, while large solar farms span thousands of acres.” This poses several interconnected challenges to the spread of clean energy: competition over land, litigation and protests from the localities where these projects are planned, and once the project is finally complete, transmitting that energy all the way from the rural areas with space for solar and wind farms to the urban centers where it is needed. 

To meet these needs, according to the U.S. Department of Energy, the country will need 47,300 gigawatt-miles of new power lines by 2035. That represents a 57% expansion of the existing grid. Meeting that goal will require a two-fold increase in the current rate of construction. The issue is not building materials or even labor – although that’s another challenge in and of itself. The real issue is the aforementioned glacial pace of the bureaucratic processes which underlie permitting and oversight of clean energy projects as well as grid expansion. A must read on Oil Price.

Natural gas prices continue to flounder. The EIA reported that working gas in storage was 2,141 Bcf as of Friday, May 5, 2023, according to EIA estimates. This represents a net increase of 78 Bcf from the previous week. Stocks were 509 Bcf higher than last year at this time and 332 Bcf above the five-year average of 1,809 Bcf. At 2,141 Bcf, total working gas is within the five-year historical range.

This morning the oil market is going to try to shake off the banking turmoil and focus on the greater risk to supplies. The market is getting extremely oversold and it's still out of touch with supply and demand realities. Market weakness should be used to put on bullish strategies as we expect the market should bottom out soon and start regaining some of the losses caused by the banking scandals.

Make sure you invest in yourself all weekend long. Stay tuned to the Fox Business Network. The only network that is invested in you!

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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