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Capacity Tapped Out. The Energy Report
By: Phil Flynn | March 7, 2023

Oil prices can fret about what Fed Chair Jerome might say today or they may fret that in the UK they are asking people to conserve power. They might fret that the Kremlin said that they do not recognize the price cap but underlying the noise is the fact that global spare oil production capacity is at historic lows.

Short sighted green energy pipedreams and the ESG movement are largely to blame for the historic underinvestment in fossil fuels. The situation is so obvious that as Reuters reports, “U.S. energy executives and top OPEC officials on Monday discussed concerns about a lack of spare oil production capacity at a private dinner on the sidelines of a Houston conference, an executive who attended said. The dinner with shale producers and OPEC officials continued a tradition that began around five years ago when they were fierce competitors. It has been held in most recent years during the CERA Week energy conference in the U.S. oil industry capital. The main takeaway from their discussion was concern among those present that there was little spare capacity in the market, Devon Energy (DVN.N) Chief Executive Officer Rick Muncrief told reporters as he left the restaurant. Do You Think?

For years I have been warning of the coming energy crunch. The reality is that with China reopening and continuing demand improvements with recent economic growth, we will see the global crude market sink into a deficit in the coming months. There will not be US Strategic Petroleum Reserves this time to cool off the market. And sadly, the Biden administration failed in its attempt to buy oil back leaving us with a void in emergency supply. On top of that the Energy Information Administration is vowing to fix its oil data that may have been giving the oil market a false sense of supply security.

The historically warm winter has also given the market a false sense of security that the oil crisis is over. Yet in the UK they are still having issues. Tomorrow, the UK grid may request that some households cut their power consumption. I guess that is what happens when the wind does not blow and the sun does not shine.

The world has also has a sense that the price caps on Russia are working. Nothing could be farther from the truth. The reality is that prices have not tested the price cap level and when they do we will see shortages. The US Energy Envoy Amos Hochstein said, “The price caps imposed by the G7 and allies to force Russia to sell its crude and fuel at a discount are working well” but that ignores reports that Russia is selling their oil well above the Urals price.

Reuters reported, “The Kremlin said on Tuesday that it did not recognize the price cap introduced by Western countries on its oil exports, after the United States said that the cap was “working well”. Washington was one of the key architects of the Western price cap on Russian oil, which aims to drive down Moscow’s revenues used to fund its invasion of Ukraine. “We do not and will not recognize any cap. We are working so that this system does not harm our own interests,” Kremlin spokesman Dmitry Peskov told reporters.

Oil should see a draw in tonight’s API report. The market for oil may move on Fed Chair Powell’s comments but his comments should only have a short-term impact. The revenge of the refiners is coming as they start to come out of maintenance leading to projected larger and sizable crude draws in the weeks ahead. Product draws are also expected and we should see the crack spreads head back up perhaps to record highs.

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