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The Energy Report. Disagreeable/St Valentine’s Day Natural Gas Massacre
By: Phil Flynn | February 15, 2024

OPEC and the International Energy Agency can’t seem to agree on anything. Not only has a war of words broken out between these two groups, they continue to see the global energy markets from different world views.

The IEA has changed its mission from securing energy security into a political lobbying group for green energy. As I have written many times before, they are willing to forgo energy security and affordable energy prices and do almost anything to further their green agenda.

OPEC for their part has called out the IEA as it warns like many others in the energy industry that we are green-walking our way into a major global energy crisis and ignoring the fact that we are massively underinvested in fossil fuels and the record investment in green energy has not been enough to change that reality now or in the near future.

Today the IEA is again predicting that oil demand growth will slow while OPEC believes the opposite. In the past the IEA has consistently underreported demand because let’s face it, they are talking from their green energy book. They need to downplay demand so they can convince governments to forgo their energy security and economy to pay homage to the big green energy industry.

The IEA in their most recent report says that, “Global oil demand growth is losing momentum, with annual gains easing from 2.8 mb/d in 3Q23 to 1.8 mb/d in 4Q23.” They cite, “A sharp drop in China underpinned an 830 kb/d decline in global oil demand to 102.1 mb/d in the last quarter of 2023. The pace of expansion is set to decelerate further to 1.2 mb/d in 2024, compared with 2.3 mb/d last year. China, India, and Brazil will continue to dominate gains.” Yet if demand is so bad, is it not the least bit disturbing to the IEA that supply is so tight? In their own report, they write that “Global observed oil stocks plummeted by about 60 mb in January, preliminary data indicate, with on-land inventories falling to their lowest level since at least 2016. “World oil supply in January posted a sharp decline of 1.4 mb/d m-o-m after an Arctic blast shut in production in North America and as OPEC+ deepened output cuts.” Yet they justify that by writing that, “Record output from the US, Brazil, Guyana and Canada will nevertheless help boost non-OPEC+ supply by 1.6 mb/d this year compared to 2.4 mb/d in 2023, when total global oil supply rose by 2 mb/d to an average 102.1 mb/d.”

The IEA also says that, “Refinery throughputs are set to accelerate from a seasonal low of 81.5 mb/d in February. Atlantic Basin activity will recover from US weather-related disruptions that cut runs by up to 1.7 mb/d, despite a pickup in planned maintenance and as new capacity comes online in the non-OECD. For 2024 as a whole, refinery crude runs are forecast to rise by 1 mb/d to 83.3 mb/d, as a 330 kb/d decline in the OECD mitigates non-OECD gains.” They also point out the sharp increase in refinery margins. The IEA says that refining margins recovered from early-January weakness in the Atlantic Basin, led by the US Gulf Coast following the mid-month winter freeze. Although Singapore margins posted a narrow m-o-m gain, the $4.50/bbl increase on average in USGC margins was driven by the late-month rally in cracks that pushed Atlantic Basin margins to their highest level since late September.

Refining activity in the United States dropped to the lowest level since 2020 in yesterday’s Energy Information Administration (EIA) report. That sharp drop in refining runs led to an incredible 12 million barrel plus increase in crude supplies but because the products did not fall as much as they did in the American Petroleum Institute report, the market pulled back a little bit even though the supplies the product are too tight to be comfortable. A big part in the drop in refining activity was due to the shutdown at the BP Whiting IN refinery. A power outage that led to flaring has kept that refinery down longer than anyone had anticipated we have seen a big spike in gasoline prices in the Midwest and jobbers are getting smaller allocations keeping supplies very tight.

That explained why U.S. crude oil refinery inputs averaged just 14.5 million barrels which was 297 thousand barrels per day less than the previous week’s average. Refineries operated at only 80.6% of their operable capacity last week. Gasoline production increased last week, averaging 9.2 million barrels per day. Distillate fuel production decreased last week, averaging 4.1 million barrels per day. That put U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) up 12.0 million barrels from the previous week. At 439.5 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year. Total motor gasoline inventories decreased by 3.7 million barrels from last week and are about 2% below the five-year average for this time of year but they did not fall as hard as the API Reported. Distillate fuel inventories also decreased by 1.9 million barrels last week and are about 7% below the five-year average for this time of year.

The people I am talking to in the natural gas industry are calling it the Saint Valentine’s Day natural gas massacre. Reuters pointed out that U.S. natural gas prices have fallen to the lowest level for more than 30 years after adjusting for inflation as the market is hit by persistent over-production. Ultra-low prices are sending the strongest possible signal to reduce drilling as well as maximize gas-fired power generation according to Reuters and that is being echoed by people I am talking to in the industry. This recent price crash when adjusted for inflation is going to be a crisis for small producers as well as a problem for banks that lent them money. That is happening now as many companies have to adjust to the natural gas massacre.

Seeking Alpha wrote that, “Comstock Resources, Inc. has suspended its dividend and is going from seven rigs to five rigs. This helps reduce its projected 2024 cash burn, but it still may end up with close to $200 million in cash burn at current strip prices. Comstock appears to be able to manage through weak 2024 natural gas prices but will want significantly improved 2025 natural gas prices.

Comstock will be the first of many. While the cutbacks and rigs should at some point reduce production and put in a bottom on natural gas because we know that always low prices eventually cure low prices, it may take longer than it did the last time. Many producers can produce oil and use gas as basically a waste product if they’re making enough money on crude the associated gas can be basically given away. Of course, many producers cannot just give it away. Last time we saw a price crash we saw prices recover pretty dramatically in just 12 months we went from below $2.00 to above $6 down the road that could happen again but it may take longer this time because of that associated gas production.

This comes at a time when the US power grid is getting worse because of the Green New Deal. Naureen S Malik from Bloomberg writes that we are seeing the growing risk of unpredictable power surges that threaten not only the US power grid but also maybe the safety of your own home. She wrote the story of her own home that was damaged by fire due to a power surge. She wrote that, “An electric substation, which had been dealing with a rodent infestation, had a sudden, unstable surge in voltage. She warns that, “At least 1 million US homes are at risk because of something most Americans don’t have much knowledge about: dangerous power quality. Malick writes that, ‘When homes experience good, or stable, power quality, it means that the flow of electricity powering lights and appliances is being delivered at an even and predictable pace, ensuring electricity consumption is perfectly matched with supply every minute of the day. But she says that It’s the sudden surges or sags of voltage that can lead to disaster.

Malik said that, “Typically, utilities, municipalities, and regulators lack the technology and reporting mechanisms for finding and disclosing that connection. In some ways, the lack of knowledge and public reporting around this threat makes it appear more menacing. Interviews with more than two dozen experts, along with exclusive data, public reports, and regulatory filings, paint the picture of a country dealing with power quality that’s rapidly worsening, with potentially deadly consequences.

These issues have existed for decades, with grid operators responsible for minimizing and controlling the danger. But as the US grid comes under increasing stress, the problems are getting much worse.

She quotes Eversource which has been involved in two incidents put out emailed statement that said, “Stress on the nation’s electric grids is accelerating at an unprecedented clip. Demand is climbing just as aging infrastructure strains under the massive overhaul needed to adapt to renewable energy. This convergence is making it harder to maintain safe, reliable power quality, and some regulators and utilities aren’t tracking the problem. It’s an issue that has a potential national price tag of hundreds of millions of dollars, if not more.

Malick said that, “Fire departments responded to an average 46,700 home fires a year involving electrical failure or malfunction in 2015-2019, according to the National Fire Protection Association. These blazes caused about $1.5 billion annually in property damage along with being responsible for 390 civilian deaths and more than 1,300 injuries, She says that, “Stress on the nation’s electric grids is accelerating at an unprecedented clip. Demand is climbing just as aging infrastructure strains under the massive overhaul needed to adapt to renewable energy. This convergence is making it harder to maintain safe, reliable power quality, and some regulators and utilities aren’t tracking the problem.

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