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Not So Clear Cuts. The Energy Report
By: Phil Flynn | February 21, 2023

Russia’s oil production cuts are not so clear cut. Russia’s announced 500.000 barrel a day production cut caused a surge in buying in Russian barrels and even motivated the Biden administration to shuffle barrels from the SPR forward which should lead to a supply deficit later this year. This comes as JODI says that global oil demand, instead of falling, is at record highs. Is it any wonder that oil companies are buying their stock back when the Biden administration continues to meddle in the market?

Yet now, according to Reuters, Deputy Prime Minister Alexander Novak said on Tuesday, “We will watch how the situation on the market develops, and decisions… will be made from this. Now, the decision is for March,” the TASS news agency reported him as saying. The cut will be made from January output levels, Novak added. He has said production stood at 9.8 million-9.9 million bpd last month. These reports caused a slight dip in prices, but it was short-lived because the reality is that Russia could announce an even larger cut in April if they wanted to squeeze the market. I am sure that Russia is not very happy with Biden’s trip to Ukraine, and many taxpayers are wondering why all this cash is going to Ukraine while the homeless in this country are living in camps on the streets. Russian President Vladimir Putin for his part is warning that long-range missiles being introduced by the west will lead to an expansion of the war.

Bloomberg News is reporting that President Vladimir Putin said Russia will suspend its observation of the New START nuclear weapons treaty, dealing a blow to the last accord with the US limiting their strategic arsenals. Russia won’t allow the US and the North Atlantic Treaty Organization to inspect its nuclear facilities, though it won’t be the first to resume testing of its atomic weapons, Putin said in his state-of-the-nation address to parliament and top officials in Moscow on Tuesday. The treaty that was extended in 2021 is due to expire in 2026.

Ah, the world is a much safer place with Biden at the helm. More geopolitical risk premium in oil is coming from Iran. Bloomberg News reported that, “The International atomic monitors in Iran last week detected uranium enriched to levels just below that needed for a nuclear weapon, according to two senior diplomats, underscoring the risk that the country’s unrestrained atomic activities could prompt a new crisis. The International Atomic Energy Agency is trying to clarify how Iran accumulated uranium enriched to 84% purity — the highest level found by inspectors in the country to date, and a concentration just 6% below what’s needed for a weapon. Iran had previously told the IAEA that its centrifuges were configured to enrich uranium to a 60% level of purity. Inspectors need to determine whether Iran intentionally produced the material, or whether the concentration was an unintended accumulation within the network of pipes connecting the hundreds of fast-spinning centrifuges used to separate the isotopes. Yeah, that’s it. That pipe thing.

In the meantime, global oil demand is rising, and daily production is falling. That is what is being reported by Joint Organizations Data Initiative (JODI). They say that global oil demand climbed in December by 1.3 mb/d to a new record high. Demand growth was driven primarily by gains in Japan, Indonesia, and Korea. Meanwhile, global crude production declined by 274 kb/d in December to a 5-month low, led by losses in the US and UK. Global demand was at 102 percent of pre-COVID levels in December, while crude production was at 96 percent of pre-pandemic levels. While markets tightened compared to November, global inventories of crude and refined products climbed counter seasonally by 5.46 mb. Inventories remain 354 mb below the five-year average. The increase was helped by a warm winter. The lack of heating demand allowed for the counter-season build. Yet based upon the fact that supplies are still well below average should still be a major concern for markets.

We have demand exceeding expectations and production falling. China’s demand for oil is rising as there are reports that Chinese oil imports will hit record highs. Copper prices are soaring on signs of more Chinese demand and grains are getting a boost on that and the weather and the war in Ukraine. Reuters is reporting that Ukraine grain exports are down 28.7% at 30.3 million tonnes in the 2022/23 season so far, hit by a smaller harvest and logistical difficulties caused by the Russian invasion, agriculture ministry data showed on Monday. The volume so far in the July to June season included about 10.8 million tonnes of wheat, 17.4 million tonnes of corn, and about 2 million tonnes of barley. Exports at the same stage of the previous season were almost 42.5 million tonnes. The ministry said grain exports so far in February had reached 3.3 million tonnes as of Feb. 20, down from 4.07 million tonnes in the same period last year.

BP is turning back from the green madness of the so-called move beyond petroleum but is it really fast food that is their future? Dan Molinski at the Wall Street Journal writes that, “BP originally stood for British Petroleum, then Beyond Petroleum, and now … Burgers & Pizza? That might be a stretch, but the company’s announced acquisition of TravelCenters of America for $1.3B in cash does give it a much larger footprint in the convenience business of 24-hour snacks and goodies, and full and quick-service restaurants. “The acquisition expands BP’s exposure to convenience with about 70% of TA’s gross margin generated from its convenience services businesses, and will almost double BP’s global convenience gross margin,” says Tudor Pickering in a note. BP itself names convenience as one of its top-five “strategic transition growth engines” that could fit well with EV-charging and other changes to how people travel.

Oil prices and products are in a wild trading range but seasonally and from a supply and demand standpoint, should be poised to break out on the upside. US crude supplier builds should show withdraws soon as refiners ramp up out of maintenance.

Natural gas is still plummeting. Talk of a polar vortex has some traders saying that it will be too little too late to save the market. I sure wish they has liquidity in back dated options.

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