June 6, 2022

Crude oil markets clutch at straws as road fuels drive demand.

A strange week in many ways as market confidence flowed on Monday and Tuesday, fell flat on its face by Wednesday but recovered much of its swagger by close of business on Friday!

An ICE Brent close of $119.72 (more or less unchanged on the week) doesn’t really tell the full story of the last 7 days. A market which hit just shy of $125.00 on Tuesday was fast approaching $115.00 by Wednesday. However, whilst the U.K. was effectively closed and partying for a few days to celebrate Queen Elizabeth’s Platinum jubilee and 70 years on the throne a few other things were happening to change the mood of the party for those engaged in the oil industry. Markets always react upwards to tense situations. This week they all came at once from Thursday onwards! Russia claimed their huge offensive to conquer cities in Eastern Ukraine to be an ongoing success,(I guess it depends who you ask!!) and announced they are making further inroads into Eastern Ukraine thus extending Russia’s borders and digging in around vital grain exporting Ukrainian ports.

As tensions rose still further President Macron asked President Putin yet again to “stop this stupid war” in a “patty paws” kinda way but no cracks appeared in Putin’s resolve to see this war out. To add to the tension Kim Jong Un, North Korea’s version of a 21st-century lunatic fired off 8 ballistic missiles today taking his total for the year to 31….7 more than for the whole of 2021!

There is a real and present danger warmongers like him are taking notes on Russia’s progress or lack of it in Ukraine and will provide a blueprint for North Korea to roar harder at South Korea. China continues its warlike half glance at Taiwan. Meanwhile, America stares at both.

As the month turned Iran re-entered the headlines too by arresting 2 Greek oil tankers each holding 1million barrels of crude oil, the act allegedly in response to the U.S. arresting an Italian tanker carrying Iranian oil in late May. To keep the ball rolling more headline news from OPEC+ changed the direction of the crude oil market but not in a way this writer expected! On Thursday, the alliance met for just 11 minutes, helpfully announcing a crude oil output increase of 648,000 barrels per day for July and August… apparently with Russian approval!
The theory being consumer demand will increase markedly in the summer as the driving season kicks in. At any other time, an increase in OPEC production would have seen the bulls checkout for a breather and a towel down to review their positions, but not this time around….. “markets” took a completely different approach claiming the opec+ increase should have been 1.5 million barrels per day or even more and suitably ignoring the fact Saudi Arabia, Iraq and the UAE are the only members of the alliance who could increase production anyway. Many other producers remain below quotas due to operational constraints. The White House welcomed the increase in supply and then took a slap in the face as they watched markets go up to $3 per barrel as a result!

One thing we can say is the World is preparing to transport its oil and gas via new routes primarily to avoid Russia. To add to the mix of creating a “new world” for the transportation of fuels and financing new supply without Russia, western governments are taking a sharp look at how to bring consumer fuel prices lower and under better control…. their new target to raise revenue being “Big Oil” who are making multi-billion dollar profits from trading and refining (gasoline and gas oil profit margins for refiners are over $40 per barrel currently !) and apparently should be paying much higher tax rates because of it! They find themselves suddenly at the top of the list as administrators look for a piece of the pie to finance their new strategies to bring consumer oil prices down again.

As long ago as Thursday the Biden administration raised the spectre yet again of a tax on oil and gas windfall profits to provide a gas, diesel and gasoline subsidy for American consumers struggling with high energy prices. The news follows a similar move in the U.K. by Chancellor Rishi Sunak on May 26, to impose a 25 per cent windfall tax on North Sea energy producers to provide a 15 billion pound ($18.9 billion) energy fund subsidy for Britons paying for soaring fuel costs.

A very mixed week drew to a close with tensions rising yet again around the world leaving us in the blue corner with extremely strong high road fuel prices fuelling major concerns over supply and in the red corner crude oil prices handcuffed to shock and awe news and seemingly shooting from the hip day after day regardless of fundamentals. We seem a very long way from a coherent oil market, a very long way indeed. Something has got to give but, short term, that won’t be anytime soon. Long term, the countries of the world may find themselves at a party with greater joy, variety and choice versus today where many are chained to parties with only dictators calling the tune.
Stay safe


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