The Energy Report: OPEC+’s Spare Production Capacity Is Razor Thin

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More reports that OPEC plus is failing to meet its production quotas is raising larger concerns about OPEC’s real ability to produce more oil if needed.

Those concerns right now are being highlighted in a report by Platts analytics. They estimate that the OPEC plus spare production capacity could shrink to 800,000 barrels a day by June if it maintains its monthly quota increases. This could create a very uncomfortably thin market buffer in the second half of the year according to Platts.

If that is indeed the case, then any type of disruption around the globe could cause an oil price spike. This is a risk that we have warned about and something that we have seen coming. We are not surprised by this at all and it’s one of the reasons why we have been telling our clients and anybody who will listen that they need to be hedged for upside risks.

Platts reported that OPEC+ Russia said production would increase by 310,000 barrels per day b/d last month. A nice effort but a total failure if you want the market to believe that you have the will and or the ability to raise production to keep up with growing oil demand.

Still, they point out that quota compliance hits 116.5%, the highest since pandemic cuts were instituted in spring 2020, a big change from the old days where OPEC always overproduced. The reports say that big production gains from Venezuela, Kazakhstan, Saudi Arabia, Iraq, and Angola more than offset losses in Libya and Nigeria.

Of course, with Venezuelan oil production rising, it’s really a question as to why it’s rising when the Biden administration has strict sanctions on the country. Well, the answer is obvious. Venezuela and Iran both don’t fear the Biden administration because they know that they are a paper tiger and it is unlikely they will crackdown on them.

Bloomberg News points out that both of these countries are selling their oil to China with little or no interference by the Biden administration. “China doubled down on imports of Iranian and Venezuelan crude in 2021, taking the most from the U.S.-sanctioned regimes in three years, as refiners brushed off the risk of penalties to scoop up cheap oil.

“Crude oil processors in the world’s biggest importer were observed to have bought 324 million barrels from Iran and Venezuela in 2021, about 53% more than the year before, according to data from market intelligence firm Kipler. That’s the most since 2018 when China took 352 million barrels from the two nations.”

China’s big oil appetite imports of Iranian and Venezuelan oil jumped to a 3-year high in 2021. This flagrant violation of sanctions it’s a big slap in the face to the Biden administration. It shows the weakness of this administration and one of the reasons why they have lost control of the global oil market. This comes at the expense of the U.S. oil and gas industry, one that this administration despises and disrespects. The industry that they ignored when they realized that we needed more global production.

The Biden administration’s failures continue to multiply in the energy space and they are now even considering trying to load electric cars, the administration’s dream machines, into the Renewable Fuel Standard (RFS) biofuel law to include not just biofuels but electric cars.

“The U.S. biofuel blending program known as the Renewable Fuel Standard (RFS) could see its most transformative year yet in 2022, as the Biden administration must make decisions to reset statutes that mandate U.S. renewable fuel blending.

“The program was designed to mandate certain volumes of renewable fuels to replace or reduce petroleum-based fuels. Oil refiners, which are required to blend the billions of gallons of biofuels into their fuel mix, say the program is too costly and needs to be reined in. Corn farmers and biofuel producers like the standards, as they have helped to build a multi-billion gallon market for their products. Congress created the RFS in 2005 and expanded the program in 2007. The Environmental Protection Agency (EPA) administers it.

“At the beginning of the program, Congress set yearly volume requirement targets of renewable fuel for the program through 2022. Currently, the proposed volume requirement for 2022 is about 21 billion gallons. Refiners that do not blend the biofuels can buy tradeable credits, known as RINs, from those that do to show compliance with the mandates.

Some oil refiners have been exempted from the requirements in previous years because they were able to prove financial harm in what is known as Small Refinery Exemptions. “This year the EPA will have to decide on the next phase of the program in coordination with the department of energy and the department of agriculture.

The EPA plans to propose requirements beginning in 2023 in May this year, with a final rule to come in December. Corn farmers and biofuel producers want the EPA to raise required blending volumes of renewable fuels, said Scott Irwin, professor of agricultural and consumer economics at the University of Illinois.

“Meanwhile, merchant refiners say the costs of the program are too high and threaten jobs and business at smaller refineries. “The crude oil refining side wants to give a permanent haircut to the RFS so that growth in biofuels would have to be market-driven rather than driven by mandates,” Irwin said.

It’s too soon to say how the administration will approach finalizing its proposals, however, several factors could come into play. “Oil prices and gasoline costs for U.S. motorists rose to multi-year highs last year, and with midterm elections approaching, the administration is wary of hindering the production of oil and petroleum-based fuel supplies.

However, the White House has set aggressive targets to reduce carbon dioxide emissions and fight climate change. The RFS could be a key tool in this fight going forward, through incentivizing the production of renewable fuels. The White House has to weigh the interests of refining, labor unions, farmers, and consumers.

“The EPA is considering making electric vehicle power generation eligible for renewable fuel credits, a top official told Reuters in December, after the White House directed the agency to study how using renewable fuels to power electric vehicle charging could generate tradeable credits. The move could boost the U.S. electric vehicle industry, which only accounts for roughly 2% of the U.S. vehicle fleet.

“It’s also unclear how the program will incorporate Small Refinery Exemptions going forward. The EPA recently proposed the rejection of 65 pending applications for the exemptions, but the action is not final.

“Some have speculated that the program will be less focused on corn-based ethanol, the most widely used biofuel and a key lobbying force in the industry, and instead around advanced biofuels such as renewable diesel, made from plant oils or animal fats. “I don’t think there’s any doubt that the future trajectory is going to be weighted toward advanced biofuels,” Irwin said. “What’s going to be interesting to see in the reset is how advanced versus conventional is handled.”

Cold weather is trying to help the natural gas market breakout. Imports of U.S. liquefied natural gas is hitting the shores of Europe but still there are concerns about tight supplies in that marketplace. Ongoing tensions between U.S. and Russia and Ukraine is going to keep that market on edge.

Europe has given Putin the keys to the energy Kingdom in Europe and he’s using that to his political advantage. The United States needs to learn from this situation. The market will take its cue today from the American Petroleum Institute report that comes out at 3:30p central time. This week’s report could show a wide divergence of opinion. Most people expect a small building in supplies.

We are looking for a relatively large draw of three million barrels and also believe that the death of gasoline demand has been greatly exaggerated. We expect the gasoline demand will start to show up once again. The last couple of weeks, numbers have been very erratic but we expect the trend for gasoline demand to be strong and come in above average.

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