The Phil Flynn Energy Report
A Moratorium on the Drilling Moratorium
A loss for the Biden administration, but a big win for common sense; that’s what happened when a judge threw out the Biden administration's ill-conceived drilling moratorium for oil and gas on federal land.
The Wall Street Journal reported that “[a] federal judge in Louisiana issued a preliminary injunction blocking the Biden administration from pausing new oil and gas leases on federal land. Judge Terry A. Doughty of the U.S. District Court in Monroe said the administration doesn’t have the legal right to stop leasing federal territory for oil-and-gas production without approval from Congress.”
The judge pointed out that millions, possibly even billions of dollars are at stake, not to mention local funding for jobs and workers in the states that sued. It also dried up the funds for the restoration of the Louisiana coastline. I guess there must be some casualties in the war on carbon.
The states that are suing the administration are Louisiana, Alabama, Alaska, Arkansas, Georgia, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Texas, Utah, and West Virginia. Biden's energy policy is looking a lot like burning down the house you own before having the money to buy a new one.
In the meantime, oil prices are continuing to rise as more people jump on the bullish bandwagon. Suddenly, the mainstream press are reporting on the bullish fundamentals for oil that we’ve been talking about for over a year: We warned that there was severe underinvestment in traditional fossil fuels. We warned that Biden's climate agenda would further exasperate that problem. We warned people that the Covid-19 demand destruction would be temporary and, despite the belief by many people at the time that demand destruction for oil and gas would be permanent, we’ve already been proven correct.
We told people that the historical OPEC+ production cut would be successful in reducing the oversupply that drove oil prices sub-zero to an all-time low. We told people even before Covid-19 that the lack of investment in traditional fossil fuels was going to hurt us at some point in the future. The Covid-19 price crash exasperated the problem and now we're facing a future of ever-tightening supply.
When you look at the global oil market right now, we're seeing the most significant potential shortage situation that we’ve seen in many years. We could even repeat the type of move for oil that we saw in the run-up to the 2008 financial crisis. The global oil market looks to be undersupplied, not only in the short term, but in the long term, too. Even if OPEC+ raises production and even if Iranian sanctions are lifted, we don't believe that they have the spare capacity to meet the growing demand.
The Biden administration, in their war against climate change, will hamper the comeback of U.S. oil and gas production. That might be alright if we had a viable replacement at this time, but the problem is that we don't. The administration has put the cart before the horse when it comes to their climate change agenda. They're willing to restrict U.S. oil and gas production before the alternatives are available.
The only way they think that's going to happen is if oil and gas prices go up dramatically, making the cost of alternatives somewhat palatable; the problem is, we don't have the capacity to replace growing global energy demand with alternatives. Make no mistake, one of the legacies of the Biden administration will be sharply higher oil and gas prices. Depending on your point of view, it’s going to be either one of the major failures or successes of this administration.
Today oil prices are going to be heavily influenced by news coming out of the Federal Reserve meeting as to whether they’ll start to taper back bond purchases or perhaps acknowledge that inflation is getting out of control. If the market gets a sense that the Federal Reserve is going to raise interest rates sooner rather than later, it could potentially put downward pressure on oil prices. At the same time, the oil market must come to grips with global supplies that are falling at a time when global demand is rising.
Yesterday, the American Petroleum Institute (API) released their weekly report, showing a much larger-than-expected 8.537 million-barrel draw for the week ending June 11th. That draw was the biggest in almost 5 weeks and it could be a factor in causing oil prices to continue their upward trend.
The reason that the market isn’t more excited about that huge crude oil draw is because we already saw a pretty good increase in supplies for products. The API reported that gasoline supplies increased by 2.852 million barrels and distillate inventories increased by 1.956 million barrels. The increase in products suggests that we’re still seeing large imports of gasoline and diesel in the aftermath of the Colonial Pipeline shutdown.
China's crackdown on commodity prices may work in the short term, but in the long term they’ll likely fail. China, trying to cool down prices by releasing commodities from their reserve, could end up with shortages if they try to cap prices for those commodities.
In the meantime oil traders don't have to worry about slowing China's demand, at least not right now. Based on recent data, Chinese crude oil refinery runs hit an all-time high of 14.3 million barrels per day, which is up a whopping 11.6% from a year ago. They’re using a record amount.
Natural gas prices may have put in a little bit of a short-term top after record-breaking high temperatures in the Midwest cooled off. Still, we're getting a little preview of our future under alternative energy: states that rely on alternative energy are asking their customers to reduce their usage or face rolling blackouts.
Both Texas and California are making those warnings, since the strong demand due to warmer temperatures is taxing their systems. Overtaxing those systems could eventually lead to widespread blackouts.
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