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Off With a Bang. The Energy Report
By: Phil Flynn | May 28, 2024

The summer travel season started off with a bang. Energy markets, at least for the moment, decided to quit worrying about what the Fed may or may not do with interest rates and decided to focus on supply and demand. Oil and products are rising with increased oil and product demand expectation, rising geopolitical risk, as well as another drop the US rig count. Gasoline demand surged back of 9 million barrels a day according to EIA last week and evidence suggests that for at least the start of summer, demand might live up to lofty expectations even as bad weather put a damper on many beach plans along the Northeast over Memorial Day. AAA did predict demand for petroleum might have hit a 20 year high for this past weekend as Americans took planes, trains and automobiles.

The U.S. Transportation Security Administration (TSA) got the holiday oil buying party started after they said they screened 2.95 million airline passengers on Friday, the highest number ever on a single day. The record travel coincides with the Memorial Day weekend that marks the beginning of the U.S. summer travel season. Last week, a group representing major U.S. airlines forecast record summer travel with airlines expected to transport 271 million passengers, up 6.3% from last year. That means, more than likely, strong jet fuel demand will continue. Last week the EIA put jet fuel demand up 3.6% compared with the same four-week period last year according to Reuters.

We also have a report about oil demand in China rising by 1.3 million barrels a day in March according to JODI. While that was down year over year that is still very strong, but this may be one reason why Saudi Arabia is lowering the cost of oil to Asia for the first time in five months. The July official selling price (OSP) for flagship Arab Light crude is expected to fall by 30 to 50 cents a barrel, a Reuters survey of five refiners showed, after hitting a five-month high in June. Normally the market would take this as a negative but so far, not. It’s very possible that Saudi Arabia’s move is to regain market share, but they have given up after raising prices in the last couple of months to places like Russia.

Which leads us to the upcoming all-important June 2nd OPEC Plus meeting. As you might remember, after it was announced that the meeting went from an in-person meeting in the beautiful hotels of Vienna to an online meeting, oil traders went short on the assumption that the status quo was going to stay in place until the end of the year and there would be no surprises. So, the market expectations are that OPEC plus would do something dramatic were dampened. Now there’s growing optimism that we may get commitments from OPEC cheaters to extend their production cuts past 2025 to make up for previous cheating. Amena Bakr says that the expectation is that the 8 states that offered voluntary cuts will extend them, with a possibility of further action to support the market.

Some people were concerned about the boasts by Iraq that they planned to increase their oil production capacity to over 4 million barrels a day. That’s a negative but that is a problem for another day and not at this OPEC meeting.

The Biden administration has been a big boost for Iran’s oil production. Energy Tidbits pointed out that, “Today Iran, interim president, Mohammad Mokhber, that took over after the death of Ebrahim Raisi said that one of the greatest achievements of his predecessor was increasing Iranian oil production to 3.6 million barrels a day. He is also now bragging that Iran will hit a production level of four million barrels a day shortly.

Geopolitical risk factors for oil remain high yet the market isn’t adjusting for it because so far there’s been no major disruptions to supply. Even more attacks by the Houthi Rebels on shipping over the weekend failed to move the needle.

Over the weekend, exchange of fire between Israel and Egypt made the headlines. The Wall Street Journal reported that, “Biden is facing fresh political tension at home following an Israeli airstrike on Rafah that Palestinian authorities said killed dozens of civilians. Israel said the strike killed two top Hamas officials, but Palestinian authorities said it also led to the deaths of at least 45 Palestinian civilians and wounded others, including women and children. Israeli Prime Minister Benjamin Netanyahu called the civilian deaths a “tragic mistake” and promised to investigate.

China is calling out the United States and our support for Taiwan independence. After completing war games near Taiwan with live ammunition, China is signaling that they’re getting closer to a possible confrontation. Fox Business reported that Taiwan’s opposition-controlled legislature passed changes that favor China and reduce the power of the island’s president. The changes, pushed by the opposition Nationalist Party, give the legislature greater power to control budgets, including defense spending. The Nationalist Party, which supports unification with China, took control of the legislature with a single-seat majority after the January elections.

Bloomberg reported that, “Iran increased its stockpile of near bomb-grade uranium, a move that could flame tensions across the wider Middle East as Tehran prepares to hold presidential elections next month.

It’s the first nuclear-safeguards assessment since Iran’s president and foreign minister died in a helicopter crash just days after top officials from the United Nations’ atomic watchdog traveled to the country to secure greater cooperation in their monitoring efforts. International Atomic Energy Agency inspectors verified on Monday that Iran’s stockpile of highly enriched uranium rose 17% over the last three months, according to a nine-page, restricted report circulated among diplomats and seen by Bloomberg. That’s enough uranium to fuel several warheads should Iran make a political decision to pursue weapons.”

Bloomberg also touted over the weekend that wind and solar is going to boost US power plant capacity by 80% by the year 2035. Yet Art Berman, noted oil analyst, reacted and pointed out that we have to put that in perspective and pointed out renewables will then account for 2.2% of US energy consumption delivered. So, the death of fossil fuels consumption has been greatly exaggerated. Investment dollars that were turning away from oil and gas are starting to creep back in because reality sometimes is better than the alternative.

Natural gas is back on the rise as crazy weather over the Memorial Day weekend and the beginning of what could be a very interesting summer. Not only is the market looking ahead to near term forecasts that are calling for above normal temperatures in many parts of the country, we are also getting warnings from many private forecasters of a very active hurricane season. Suddenly, the natural gas market is starting to look a little bit better even though we still have some oversupply. Rig Zone reported that North America added two rigs week on week, according to Baker Hughes’ latest rotary rig count, which was published on May 24. Although the U.S. lost four rigs week on week, Canada added six during the same period, leading to a total North America rig count of 720, comprising 600 rigs from the U.S. and 120 rigs from Canada, the count outlined.

Of the total U.S. rig count of 600, 579 are classified as land rigs and 21 are classified as offshore rigs. The total U.S. rig count comprises 497 oil rigs, 99 gas rigs, and four miscellaneous rigs, the count showed. Horizontal rigs made up 537 of the total U.S. rig count, directional rigs made up 43, and vertical rigs made up 20, Baker Hughes revealed. Week on week, the U.S. added one offshore rig and dropped five land rigs, Baker Hughes’ count outlined. The country cut four gas rigs and eight horizontal rigs, and added two directional and two vertical rigs, week on week, the count showed.

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