September 21, 2022

Supply chain feels the pain

Another bizarre week when ICE Brent closed to the cent exactly where it opened on Monday morning, Vladamir Putin annexed 4 regions of Ukraine “forever”, the 2 Nordstream gas pipelines “1 “and “2” transporting gas from Russia to Germany sprung unexplained leaks,(note: only 2 of 5 gas pipelines from Russia to Europe remain operational) the FED, interest rate hikes and the US dollar continued to rule oil prices and the British government made a good attempt at torpedoing the £ and its own economy with radical moves to rebalance the books (a move which many onlookers considered “inept” and mortgage holders considered to be the ultimate nightmare), and let’s not forget our old friends in Opec+ waiting in the wings who are about to make the biggest production cut in years.
It’s a bumper bundle of news during a week which should provoke some significant change in oil prices but didn’t! ICE Brent started on Monday morning at $85.14 per barrel and closed on Friday evening at the same price!

A lot influenced prices this week but interpreting all of this and trying to figure the trajectory of oil prices going forward versus the daily grind of what seems to be the same and same again week in and week out isn’t easy…..but we will try! Today Wall Street continues to hold court in alignment with the FED and the power of the US dollar both of which have leaned heavily on oil prices forcing them lower and likely to continue to do so.
In the real world of physical oil lack of refining infrastructure together with the odd act of skullduggery may soon take over oil price volatility and lead the way and if that happens we are in for a steadier outlook with price spikes higher an inevitability created by hotspots of crises or increased physical oil demand.
Autumn is here and Winter approaches, physical oil product markets remain very strong with ever-present demand and limited product supply and one particular hotspot is the French refining system where capacity has been reduced to 40% due to refinery worker unrest and strikes.
Without a doubt, we are living in a world full of tension and uncertainty whether it be caused by war, loss of manufacturing, fear of financial failure (real or apparent) or plain old mismanagement, oil markets are becoming almost bored with the FED, Wall Street, the wild dollar and Putin’s now familiar threat “Moscow will use all available means to defend its territories”. It’s a statement more chilling than most but one the US has analysed includes the option for Russia to use nuclear weapons when necessary and turn off the gas supply, regardless the general perception is drifting to the idea this war will go on for years and that doesn’t help in day to day oil trading decision making.

Given all of the above, we are left staring at a more important and imminent crunch and that is the warning signs highlighted by the sabotage of the two gas pipelines this week. It may well be the shape of things to come. This may only be the beginning of a real petroleum product and gas supply problem we have not experienced before. Fear and the unknown drive markets and focus whilst remaining aware of all of the aforementioned, traders’ attention should now turn to understand the vulnerability of valuable gas and oil fields, pipelines, refineries and storage all vital to manufacturing the necessary products for Europe and the world.

Unfortunately, the sabotage of gas pipelines Nordstream 1 and 2 between the Baltic Sea and Germany may only be the beginning of such attempts to break all of Europe’s bonds in its own “war” with Russia. We had already seen warnings earlier in the year as cyber attacks on European storage installations in ARA and on the main colonial pipeline in the United States created temporary havoc in the supply chain.

If sabotage isn’t enough the US hurricane season has now kick-started too, yet another threat to manufacturing and infrastructure. The first named hurricane “Fiona” did considerable damage in Puerto Rico, the second “Ian” is a mighty storm and has left its message in Cuba and wreaked havoc in Florida. It can only be a matter of time before a hurricane approaches the Gulf of Mexico area, one of the most important regions for energy resources and infrastructure. Gulf of Mexico federal offshore oil production accounts for 15% of total U.S. crude oil production and federal offshore natural gas production in the Gulf accounts for 5% of total U.S. dry production. Over 47% of total U.S. petroleum refining capacity is located along the Gulf coast, as well as 51% of total U.S. natural gas processing capacity.

Opec+ is about to play its own cards in an attempt to keep prices up by reducing the supply of crude oil to the world to keep their yawning pockets filled with dollars. They will meet in person in Vienna on Wednesday for the first time since the pandemic began, this suggests a serious agenda. Opec watchers expect a cut of 500,000 barrels per day, many offer the cut could be 1 million or even higher. Russia could cut 500,000 barrels per day on their own so the latter figure seems more than likely. Whichever way you look at it Opec+ is influenced by Russia, Joe Biden’s visit to Saudi Arabia a few months ago to push hard for higher oil output from OPEC+ to quench rising prices lies dead in the sand. Whatever happened last week will pale into history quickly as all eyes are now on Vienna.

In summary, as we approach winter Wall Street may become a price follower rather than a price leader given the many things that can be affected by not only the knock-on impact of the war but by sabotage, the weather and strikes by dissatisfied employees and greedy Opec+ members.


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