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Peak Oil Blinders. The Energy Report
By: Phil Flynn | March 3, 2023

In the oil world, we sometimes build a wall of false narratives. That leads to the oil market’s tendency to see huge price spikes and epic market crashes.

For example, who can forget the “peak oil” craze? There were predictions that the world was going into twilight out in the desert with no oil to be found. Some said Saudi Arabia’s oil production had peaked and that crude oil was going into an oil production decline. The world was running out of oil. Some believed the world only had the capability of producing 80 million barrels of oil per day.

Or how about the more recent prediction of peak demand that said oil demand had already peaked? Now we face a world where reporting agencies grudgingly predict that demand for oil will defy expectations and set new record highs that could exceed an incredible 104 million barrels a day. I won’t even get into the predictions that shale oil would keep oil below $30 a barrel forever. These narratives can put blinders on the market that sometimes can ignore coming risks in the marketplace until it is too late.

The reality is that if oil production in the world peaks, it is because of shortsighted energy policies. Policies like a politically motivated intrusion into the oil markets with government SPR releases, the rise of the ESG movement, and woke investments that are not based on market needs but to satisfy a political agenda. The hyping of climate change risks really puts trillions of dollars into the global green energy elite while the poor are their pawns and want them to stop eating meat and conform to their radical green orthodoxy. The only upside is you don’t need a gas stove to cook insects. Climate Cazar John Kerry says that we have to change the way we do everything in our life and conform to his agenda while he racks up miles in his private jet.

Yet these policies are causing massive underinvestment in the energy sector that will hit markets faster than many expect as we should see supplies tighten significantly in the coming weeks and months. Saudi Arabia continues toward massive underinvestment in supply. Saudi Aramco CEO Amin Nasser said flatly that, “The current transition plan is flawed honestly. It is not really delivering. What we need is an optimal, realistic transition plan.” Shell Chief Executive Officer Wael Sawan said today that, “I am of a firm view that the world will need oil and gas for a long time to come. As such, cutting oil and gas production is not healthy.”

The supply squeeze concerns are real. US refiners are going to come out of maintenance soon and data coming out of China suggest that we are going to see a massive spike in global demand. US total oil demand rebounded above the 20 million barrel-a-day level last year, getting back most of the covid-19 losses of the 2020-21 period. It is going to be harder to meet that demand as US oil production seems to be plateauing and SPR releases are coming to an end. The other void in supply that the market needs to prepare for is the dwindling supply of oil coming out of floating storage as pointed out so brilliantly by Bloomberg’s Javier Blass.

Blass writes, “Releases of millions of barrels from the US Strategic Petroleum Reserve and similar emergency stockpiles in Europe, Japan, and South Korea have grabbed the attention of the oil market. But there was another release that few paid attention to — and it matters. The amount of crude held in floating storage has declined significantly, contributing to the surplus that plagued the oil market during the past six months. According to the International Energy Agency, tankers used as temporary storage facilities held 79.5 million barrels by the end of 2022, down nearly 40% from the year before. The flow equates, when averaged over the year, to about 100,000 barrels a day. Although that’s a fraction of the release from emergency stockpiles, which measured about 850,000 barrels a day on average during 2022, every barrel does count.

Blass points out that traders that bought oil to store during covid are selling as their storage contracts run out. Also, Iran under sanctions has also dumped stored oil. Blass in his must-read ends it with, “at its peak, Iran had more than 100 million barrels in tankers at anchor around the world. Since June, Tehran has sold a significant chunk, according to traders. The IEA estimates that Iranian oil accounts for about 50% of all the crude and condensate that’s left in floating storage. As with the SPR releases that largely ended this year, the distributions from floating storage are dwindling, removing another supply source and, over time, tightening the market.”

Now as the oil market tightens, the Biden administration thinks it’s time to tighten sanctions on Iran. Iran is thumbing its nose at the world community and it’s advancing its nuclear program. There are reports that Israel may be getting ready to attack and Biden is going to act tough with sanctions. Word is the Biden administration is going to enforce sanctions on Iran’s petrochemical sales and also crack down on companies and vessels that have helped with Iran’s energy exports. There is no doubt the Biden administration turned a blind eye to Iran’s ignoring of sanctions in the hope that they could get back into the ill-fated 2005 nuclear accord.

Biden’s sanctions on Russian oil seem to be failing. Russia has successfully diverted its will to other customers and now will have a big hand in raising prices as they decide to cut production in response to the EU price cap. The Wall Street Journal does a wonderful piece about the players that are making the decisions surrounding the Russian and energy moves. In a must-read, The Journals says Russia’s secret weapon is a man named Pavel Sorokin, “Russia urgently needs to develop new markets for its oil and gas companies, with Western sanctions cutting into the backbone of its economy. It’s relying on a 37-year-old former Morgan Stanley banker to keep profits flowing. Pavel Sorokin, Russia’s deputy energy minister, is part of a cadre of young technocrats with deep knowledge of the West, fast-tracked by Vladimir Putin to the upper echelons of power. Mr. Sorokin, who studied finance in London, has negotiated deals in Africa and the Middle East. He played an early role in the development of OPEC+, the partnership between Russia’s oil industry and the Saudi-led Organization of the Petroleum Exporting Countries. Last year, he was influential in exaggerating the impact of damage to the Russian-controlled pipeline to the Black Sea, a move that spooked the West and pushed oil prices higher, according to his former press secretary and a former journalist at Russia’s state-run news agency. Check it out.

Natural gas got a bullish report yesterday and continues its recovery from its crash. The rebound seems to coincide with the reopening of the Freeport LNG export terminal as well as the possibility that we could get some weather.

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