The Energy Report: Running Into the New Year

Oil is off to the races to start the new year as risk to supply and demand expectations rise in China and OPEC starts their 2.2 million barrel a day production cut today. Oil is running up in the new year and it may just be getting started.

US helicopters sank three Iranian-backed Houthi boats in the Red Sea after responding to multiple distress calls from the container ship Maersk Hangzhou which was under attack by three Houthi boats. The USS Gravely reportedly shot down two anti-ship missiles fired at the Maersk vessel then helicopters from the Gravely and the USS Eisenhower were dispatched toward the Maersk Hangzhou.

The Iranian-backed Houthi rebels of course have continually committed acts of war and have attacked commercial shipping and shut down the Red Sea shipping lanes. There has been growing pressure on the US to respond to these attacks and now they have. While the US stresses they don’t want a wider conflict, Iran is responding by sending its warship called the Alborz destroyer through the strategic Bab al-Mandeb Strait. The Houthis are warning of repercussions.

The real impact of this weekend’s action could be that more container ships will refuse to go through the Red Sea until they deem it to be safe. Maersk has said they will halt operations in the area. That will increase shipping times and add to costs. And I’m sure those writing insurance policies on the tankers are going to be a little bit more discerning.

China also could play a major role in oil recovery. Reuters reports that China’s 2024 crude import quotas are 60% more than last year. Reuters wrote, “China has released 179.01 million metric tons of crude import quotas for 2024, according to Chinese industry consultancies and trade sources on Tuesday, 60% more than the previous year. Forty-one companies, mostly independent refiners, were given the fresh quotas, with some of them allotted full-year allowances, trade sources and consultancy JLC and Longzhong said. The quota was issued in January last year according to Reuters.

The question then becomes why is China importing so much more oil. Perhaps it’s because they have issued a lot of economic stimuli to help their economy or perhaps for an economy that is doing better than people think it is. Perhaps they’re preparing for a rainy day in a world where the risk to supply is rising, a world where the war and the rumors of war abound.

You should also start the new year the way we left off the old year when it comes to the drawdowns in crude oil supplies. Weak demand in the United States, especially when it came to gasoline, was greatly exaggerated. Gasoline demand continues to be solid as reporting agencies are going to increase demand numbers. We should also see the possibility that US crude oil’s record-breaking run of production could start to set back.

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This week we expect to see crude supplies fall by three million barrels and we could see gasoline supplies fall by 2 million barrels and distilling inventories by 2,000,000 barrels as well. Globally we expect to start to see supply trains in the coming weeks especially as the OPEC cuts start to take effect.

Natural gas prices are soaring this morning. Winter isn’t over yet. Some states are trying to ban natural gas and others brag about the increase of alternative energy. The American Gas Association reports Natural gas jumped from 40% to 43% of the electric generation mix during the past year, making it the fastest-growing electricity resource since 2022.

Written By: Phil Flynn