The Phil Flynn Energy Report
On Second Thought
Oil prices are soaring back after the Department of Energy downplayed suggestions that they might use the strategic petroleum reserve to ban oil exports in an attempt to lower energy prices. Perhaps the Department of Energy realized that energy secretary Jennifer Grandholm suggestion is just talk but the reality of using the strategic petroleum reserve or banning oil exports would make the global energy crisis worse, not better. Oil is also getting a boost because the showdown over the debt ceiling was settled, at least until December, and that gave us a risk on the situation.
Of course, anybody who believed that the debt ceiling wouldn’t get solved probably doesn't follow politics very closely. But at the same time, global economic stimulus and the fact that the U.S. economy is going to keep interest rates relatively low will mean that fossil fuel demand will stay strong. The Biden administration feels the heat because he realized that average Americans are getting hurt by their energy policies and trying to misdirect the blame to Europe.
We already know that households are getting slammed with higher heating and gasoline costs, and it's almost becoming unaffordable. The European Union is looking for ways to subsidize consumers, but even that won't fill the void of the substantial economic toll on individuals in Europe. The United States is next. Unfortunately, the Biden administration's policies are doing nothing but rising energy costs. Instead of embracing the U.S. energy industry, they are now looking at stopgap measures to win back political approval.
The energy crisis in Europe is acute, and Russia, of course, is being blamed for being a non-reliable supplier. However, Reuters reports that Russia does not use its oil and gas as a weapon, a Kremlin spokesman said on Friday in response to comments by a U.S. official. On Thursday, President Joe Biden’s national security adviser Jake Sullivan said that “Russia has a history of using energy as a tool of coercion, as a political weapon.”
Kremlin spokesman Dmitry Peskov said Moscow disagreed with those comments. “We are convinced that this is a wrong assessment,” Peskov told a daily conference call with reporters. Instead, he said the United States threatened to contribute to the European energy market imbalances by imposing sanctions.
As far as my take, this is one time I agree with the Biden administration. National security adviser Jake Sullivan was right on, and that is a big problem. Let's face it; President Vladimir Putin is laughing at Europe. The Kremlin has played their energy cards brilliantly where they control, along with their Co-conspirators OPEC, a major portion of Europe's energy supply. That has given them economic power and political power. But, of course, the energy reports warned that this would happen, and other people did, so it should not surprise anybody except perhaps the global elites.
How about the only carbon-free power source? Nuclear power! Zerohedge reports that according to the 2021 World Nuclear Industry Status Report, global nuclear power generation dropped 3.9 percent in 2020 despite a 4.4 percent climb in China, where two new reactors were added. In 2021, 415 reactors were operational around the world - 22 fewer than in 2011. Another 26 are currently in long-term storage, and 53 are under construction - around half in China and India.
The rapid expansion of renewables and negative public sentiment towards nuclear energy created by disasters such as those in Chernobyl or Fukushima have turned nuclear power into an also-ran of global energy generation. As a result, nuclear power has been experiencing a slow decline from a 17.5 percent peak share of global electricity generation in 1996 to a share of only 10.1 percent in 2020, as more countries put on hold or abandon their nuclear power strategies rather than expanding them.
However, according to the report, as Statista's Katharina Buchholz notes, 33 currently run nuclear power reactors. However, only 14 are still actively pursuing the technology - including 2020 nuclear energy newcomers Belarus and the United Arab Emirates. This is a Must-Read On Zerohedge. The world's fastest-growing nuclear energy program is also one of the youngest: China has used nuclear energy since the early 1990s and currently runs 52 nuclear reactors, 39 of which joined the grid in just the past ten years.
Meanwhile, the United States remains the globe's biggest nuclear energy stronghold, with 93 operational reactor units as of July 2021, down 11 since 2011. Despite the decline, the U.S. program is listed as active, as is the Japanese one, which saw a massive loss of 39 units since 2011. At currently nine operational nuclear reactors, it is expected that Japan will soon officially abandon new nuclear energy construction. Only three countries that had nuclear energy programs have shut off all reactors - Italy in 1987, Kazakhstan in 1998, and Lithuania in 2009.
Oil prices continue to be on a tear, and it looks like we are going to make a test of the $80 a barrel area versus WTI very shortly. The market is seeing extreme volatility in oil, but as we have said before, the upside risks are still significant. As far as natural gas, volatility has been near an all-time high the last couple of days. We still expect that the prices will go higher in the long term, but we could be in a situation where, for the next few days, we would be buying breaks and selling rallies, at least for a trade.
Long-term, if you need to hedge, buy breaks on natural gas. Speculators may want to take advantage of natural gas, but the options market might be too rich for them. It might be a good time to consider butterfly option spreads. This is a combination of both bull and bear scratch and has limited risk but at the same time could give you some good profit potential. It's not the perfect strategy if you're very bullish, but it is a strategy that can make participating in natural gas moves less risky.
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