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The Energy Report

Phil Flynn
http://www.pricegroup.com/
pflynn@pricegroup.com


Stag Party. The Energy Report 04/26/2024

Stagger Lee shot Billy DeLions and he blew that poor guy down. Yesterday’s gross domestic product showed higher inflation and lower growth than expected which brings back the memories of that 70s melody called stagflation wand blew that poor stock market down. Yet despite the turmoil, petroleum products remained resilient.

The US economy grew at just 1.6%, the slowest pace in almost two years, rising 3.4% in the fourth quarter of 2023, according to the Bureau of Economic Analysis (BEA). Economic forecasts had called for a deceleration of growth over the previous month, with the expectation that the economy would expand by 2.4%, according to a Reuters report. Janet Yellen, later in the day, tried to put a positive spin on the numbers claiming that the economy is really stronger than the numbers suggest. While that is partially true, it doesn’t explain away the sticky inflation. The personal consumption expenditures (PCE) price index, excluding food and energy prices — a key metric the Federal Reserve tracks to measure inflation — increased by 3.7% after rising to 2% in the fourth quarter. Inflation is going to be one of the biggest challenges for central bankers.

Oil prices shook off stagflation fears and rallied late in the session after trading down after the GDP report because overall the fundamentals for oil are looking more bullish. Not only do we have to price in geopolitical tensions going into the weekend, we also have to be concerned about the looming supply shortage that we are seeing in the global marketplace that will see all-time record demand next month.

Reports that Israel is stepping up its attacks in Gaza as they prepare for the Rafah invasion and the ongoing concerns about Ukraine’s attacks on Russia’s oil infrastructure, has geopolitical risk factors that continue to support prices. The World Bank is warning that a conflict in the Middle East could push the price of oil above $100 a barrel and that could reverse the recent downtrend in global inflation. They said that the recent drop and commodity prices have been leveling off even before the missile strikes in Iran and Israel, but they acknowledge that the complexity of rising commodity prices is going to make global central banks jobs more difficult especially when it comes to reversing the historic amount of interest rate increases. The World Bank is predicting that crude oil prices will average $84 a barrel this year but be careful because any disruptions could cause prices to spike.

On further review, the Energy Information Administration report is very supportive and while a lot of people are concerned about the weakness in US gasoline demand the record exports continue to support this market. The administration is very worried about the potential for a gasoline price spike going into the election and yesterday’s gross domestic product number didn’t help the overall mood of the market. Tanker trackers is reporting though that there’s been a record amount of ship-to-ship transfers totaling 116,000,000 barrels of Iranian crude oil worth $1.4 billion pre discount and were visually identified in the South China Sea all headed to China. The Biden administration continues to turn a blind eye to Iranian oil sanctions and even though the passage of new sanctions should allow it, Biden should really crack down on Iran. In fact, they have the tools to crack down on Iran, but they refuse to do so.

The Biden administration did impose new sanctions on Venezuela. It appears it’s not going to slow down Venezuelans oil exports completely. Not only will it not impact Venezuelan oil exports, they are already moving to cut deals with other countries.

Bloomberg News reports that, ”Spanish oil major Repsol SA expects production to climb with the addition of two oil fields in a joint venture with Venezuela, where the company is exempt from reimposed US sanctions. The company recently signed a deal with state-owned Petroleos de Venezuela SA that adds the fields to its operations, which in the next few months are expected to produce 20,000 barrels a day, doubling what the European major currently produces in one of its three ventures, Chief Executive Officer Josu Jon Imaz said in a call with investors Thursday. The expansion agreement was signed hours before the US reimposed sanctions last week on Venezuela’s oil and gas activities. Companies such as Repsol and Italy’s Eni SpA have said previously arranged waivers with the US government allow them to continue operating. The waivers allow Repsol “to continue operations as we have been doing so far, even with sanctions in force,” the CEO said.

How’s that green energy transition going for you. In Europe competitors are making energy decisions based on politics and not reality and is causing a huge backlash in the region. Not only have we seen riots break out with farmers angry about green energy regulations but now it appears that the EU once again has to pull back on some of its green energy mandates. There are reports that the EU countries are going to reverse a distilled fuel tax that had angered farmers that essentially could put them out of business. In the meantime, the German economy is struggling because of its green energy short sightedness mayor. This is a country that says that they want a carbon free future but then went ahead and closed down their nuclear power plants. Has the entire world lost all common reason and sense?

Reuters reports that The European Commission’s next sanctions package is expected to propose restrictions on Russian liquefied natural gas (LNG) for the first time, including a ban on trans-shipments in the EU and measures on three Russian LNG projects, three EU sources said. The Commission is in the final stages of ironing out its proposal and is engaged in informal talks with member states this week. The Commission declined to comment.

The new oil market action is very positive and the big question is how much of this is going to be geopolitical risk premium and how much of it is going to be based off supply and demand. We think that the market is still undervalued based on supply and demand and we think the talk of a huge geopolitical risk premium is overstated. While there’s no doubt there’s some geopolitical risk premium in the price of oil, there are reports saying it could be as much as $5.00 or $10.00 a barrel and that seems to be very high based upon the supply and demand realities that we face. For most of this year we have expected a supply deficit going into this part of the year and apparently it looks like that’s where we are headed. This is why we’ve been recommending staying hedged for most of this year and we still believe that there is upside price risk going into the end of the year and it could be significant.

Natural gas is trying once again to find some support even in the face of a very bearish weekly injection report. The supply glut is real and one of the big problems we continue to have with the natural gas market is Freeport LNG. Reduce flows to Freeport is a concern for this market because of the oversupply. We need to move as much gas as we can and it does not help when Freeport is down. The market is looking ahead to expanded Langport capacity in the future but the uncertainty surrounding the Biden administration’s study on LNG exports is going to continue to discourage investment in US energy.

Reuters reported that the second-largest U.S. liquefied natural gas (LNG) export facility has been running below 80% of its capacity due to technical problems, data from financial firm LSEG showed, denting U.S. exports. Since Jan. 15, Freeport LNG’s Quintana, Texas, liquefaction plant has been operating without at least one of its three gas-processing trains. In the last two weeks, it has taken barely enough gas for one of its trains to fully operate.



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Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.

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Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Contact Phil at 1-888-264-5665 or pflynn@pricegroup.com.