The Energy Report: Cracked Up

Oil prices rebounded yesterday as it appears that gasoline supply is not all it’s cracked up to be. There are lingering concerns about the tightness of supply in the Midwest in the aftermath of the Whiting BP (NYSE:BP) refinery outage as well as another refinery outage.

Reuters reported that the coker and small crude distillation unit (CDU) were shut by a leak on the gasoline-producing fluidic catalytic cracker (FCC) at Total Energies’ 238,000 barrel per day Port Arthur, Texas refinery, causing the gasoline crack spread to rise and causing tightness and many of the physical gasoline delivery points. Yet underneath it, the fact that the supplies of gasoline crude oil, and diesel fuel are below average here and around the world against a backdrop where OPEC is cutting production is setting the stage for yet another rally as the market heads into the summer driving season.

The rising gasoline prices along with today’s consumer price index could be a key determining factor into how many times the Federal Reserve will cut interest rates this year. We know that at least one rate cut is on the table because the Federal Reserve, going into an election year, could not possibly cut rates after making that promise. At the same time, if it’s a one cut and done it’s possible that we could see a rebound in the dollar. In recent days the dollar has been lower.

The gasoline price situation will not win voters’ favor with the Biden administration which they realize has had an impact on rising gasoline prices. The Keystone Pipeline that Biden killed would have been up and running by now. It would have moved oil from Canada in a much more efficient manner to US refineries and out to the rest of the world. That pipeline would have moved oil more safely and more efficiently and because the oil is heavy it would have also played a big role in helping the world rely more on Canadian oil. Instead, the world has turned to Russia to fill that heavy oil void.

Biden of course did not think these things through when he killed the Keystone Pipeline purely for political reasons. The Keystone Pipeline was not about the environment, it was not about jobs for the United States. It was all about making a political statement that there was a new sheriff in town and this new sheriff was going to crack down on fossil fuels.

The killing of the Keystone Pipeline was also to restrain investment in the United States. The ESG movement along with regulatory uncertainty has set the stage for US oil production peak. Instead of increasing refining capacity to take advantage of the US shale production, Biden discouraged that by saying they wanted to replace fossil fuels. Those people who believe that Biden’s policies were OK for the US oil and gas industry really haven’t talked to people in the US oil and gas industry. Those who point to record US production is evidence that Biden’s policies had no impact on US production, must realize that it takes years and massive investment to make that production happen. Now with new taxes on oil and gas producers proposed by this administration and even more taxes on the wealthy, the boom that we have seen that has been built up over decades will start to reverse.

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Still it’s worth noting that, “The United States produced more crude oil than any nation at any time, according to The Energy Information Administration International Energy Statistics, for the past six years in a row. Crude oil production in the United States, including condensate, averaged 12.9 million barrels per day (b/d) in 2023, breaking the previous U.S. and global record of 12.3 million b/d, set in 2019. Average monthly U.S. crude oil production established a monthly record high in December 2023 at more than 13.3 million b/d. The crude oil production record in the United States in 2023 is unlikely to be broken in any other country in the near term because no other country has reached a production capacity of 13.0 million b/d. Saudi Arabia’s state-owned Saudi Aramco recently scrapped plans to increase production capacity to 13.0 million b/d by 2027.

Together, the United States, Russia, and Saudi Arabia accounted for 40% (32.8 million b/d) of global oil production in 2023. These three countries have produced more oil than any others since 1971 (counting production in the Russian Federation of the Soviet Union prior to 1991), although the top spot has shifted among them over the past five decades. By comparison, the next three largest producing countries—Canada, Iraq, and China—combined produced 13.1 million b/d in 2023, only slightly more than what was produced in the United States alone.”

Yet those in the Biden administration should not try to take credit for what has happened because of years of hard work, ingenuity, and investment that happened long before Biden came into office. Most people in the energy industry will tell you that Biden and his policy are creating an energy crisis that is going to happen in the future mainly because of the short-sighted policies of this administration.

Of course, one of the key things in the short term that will move the price of oil will be today’s consumer price index but we really have to focus on U.S. oil inventories as well. We expect to see a drawdown in crude supplies by 2,000,000 barrels and product supply by 2,000,000 barrels as well. We’re starting to see gasoline inventories tighten significantly, especially in the Midwest and we’re starting to see diesel supplies be squeezed. We’re lucky we had a warm winter because once again diesel supplies could have been much tighter than they already are. But the thing you must really keep an eye on is where we go from this point forward. As this summer driving season is coming around and even if we get a soft consumer price index in this report, the possibility of a price jump forecast is very high.

Geopolitical risks are still high. Reports that we’re seeing more bombing in Gaza has caused Iranian-backed Houthi rebels to vow to continue their acts of terror in the Red Sea.  Hot inflation and fiscal uncertainty are driving investment in cryptocurrencies, gold, silver, and platinum. Palladium also has had an incredible ride along with a very tight supply of iron ore. Physical commodities are tight and that could drive commodities that are undervalued in many ways compared to the rest of the market.

Natural gas producers are going to feel more pain as natural gas spot prices fell to the lowest level since October 2020. According to natural gas collector, the previous 2024 low was $1.37 on February 26. Obviously, they’re pointing to warm weather and that still presents a challenge to the physical price premium as prices flipped into the negative for the second time this month. Free gas, no place to go.

There are reports that China’s liquefied natural gas imports are going to rise next year after they already increased by 12.6% last year. With growing global demand for liquefied natural gas and the fact that the United States could supply gas to the world thereby replacing dirty coal, it makes no sense that Biden has paused reviews of new LNG export facilities. China's stock market is also 20% from its lows and according to Bloomberg News that is fueling predictions that China’s stock market has bottomed out.

Written By: Phil Flynn