All Hail Opec! Welcome to Gallatin Research

Cheers Everyone!

Welcome to Gallatin Research! We were formally Energy Spoils & Toxic Capitalist. As you recall, we were having issues with our previous newsletter publication company. We received a lot of feedback from readers in the suggestion boxes we had. We've decided to make a full fledge energy and markets research company. This newsletter specifically will be made up of 70% energy markets and 30% stock market research (we know you care about your investments alongside of your profession). I know quite a few of you had already paid for monthly or yearly subscriptions on the previous platform and those will be corrected this week so your membership will remain active. 

I'm glad you're apart of the family and I hope you enjoy our research moving forward.

What has been going on in energy?

To be frank, a lot has happened over the last few weeks. Geopolitics, war, SPR release, OPEC. The list goes on and on. Todays newsletter will be fairly long as we have a lot to catch up on. The above chart is where I think we will head over the next few weeks. First slightly down followed by the real breakout in crude oil.

All hail OPEC!

OPEC and its non-OPEC partners are convinced that they are the oil market's good guys. They took turns boasting last week about how their plan to restrict output will result in more stability. Saudi Arabia was the major savior, leading from the front. According to the country's energy minister, the producer group is performing its job to secure stable and sustainable oil markets. Try telling Joe Biden that. The US President is fighting high gasoline prices ahead of the midterm elections next month. In Washington's perspective, OPEC has become the public enemy number one. Following OPEC's actions, the Biden administration (again) played the SPR card, announcing intentions to sell 15 million barrels of crude oil for delivery in December (the final tranche of the 180 million bbls Spring announcement). As in the past, the announcement had no visible effect on pricing. The volumes involved will have no significant influence on the oil balance. President Biden has left the door open for more announcements early next year. However, the sooner he realizes this is a futile exercise, the better.

Away from the supply side, market participants were always thinking about the deteriorating oil demand picture last week. Concerns were allayed by rumors that China was considering relaxing Covid-19 limits. Beijing has proposed shortening the Covid quarantine period for tourists. The mere mention of loosening limits fueled optimism for a revival in demand for the world's largest oil importer, propelling prices higher. However, the pleasant vibes were short-lived. China unexpectedly postponed the publication of important economic figures, including third-quarter GDP. This was interpreted as a warning sign for oil demand. Early this morning, growth estimates showed that China's economy grew by 3.9% in the third quarter, beating predictions but falling short of the stated objective of roughly 5.5%. Furthermore, Chinese President Xi Jinping said that the country's zero-Covid policy would be maintained indefinitely. To put it another way, there is no light at the end of China's Covid tunnel.

Another key component of the oil market's worry wall is uncontrolled inflation and tightening monetary policy. Last week, Federal Reserve policymakers queued up to give hawkish messages. According to the consensus, underlying US inflation has not yet peaked. In other words, the US central bank's interest rate hikes are proceeding at full speed as it fights inflation. This reinforced predictions for another significant increase next month, lending support to the US dollar's positive trajectory.

All of this contributed to tumultuous price activity in the oil market. Crude oil prices have made more 180-degree turns than the British government. Brent and WTI finished the week with small weekly increases. The sharply backwardated market structure is one constant. Brent's prompt backwardation closed above $2/bbl for the first time in over two weeks on Friday. Products did poorly. Heating oil prices fell 3% last week as chances for gas-to-oil switching, a crucial pillar of price support for the middle of the barrel, deteriorated. Ample supplies (92% of EU gas storage is full) and falling gas prices (EU TTF gas prices are at a four-month low) have lowered prospects for gas-to-oil switching in the coming months. European gasoline prices fared significantly better, ending the week only slightly down, despite dwindling fuel stockpiles as a result of weeks of refinery strikes in France. Gasoline supplies in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage area plummeted to their lowest level since early July.

The disparity in fortunes between oil and products is attributable, in part, to an impending shortfall in Russian crude supplies. Traders expect a significant drop in Russian barrels in December as EU regulations take effect. That may not be the case with the projected Western price restriction on Russian oil. Last week, US Treasury officials said that genuine Russia might essentially avoid the planned price cap on its oil since it will likely have access to sufficient own vessels, transport, and insurance services to carry its oil. According to estimates, Russia might continue to ship 80-90% of its oil outside of the price cap system.

Brent crude is now trading above $90 per barrel. However, demand weakness limits the upward potential. At the same time, the downside is constrained by a contracting supply horizon. Those advocating for a return to triple-digit oil prices before the end of the year, though, remain steadfast. They point to, among other things, unsustainable bullishness in scarce inventories. They could, however, be undone by the most unexpected of comebacks. After a three-month suspension, oil supplies from Nigeria's 400,000 bpd Forcados facility resumed at the end of last week. The restoration of oil shipments from Forcados could result in a significant rise in Nigeria's oil production and exports. It will not only pave the door for Nigeria to restore its long-held position as Africa's greatest oil producer, but it may also help to alleviate a supply shortage. Nigeria coming to the rescue? Don't put money on it.

US export ban? Don't be silly

Joe "SPR" Biden is back at it. Last Wednesday, the US President disclosed plans to release 15 million barrels of crude oil from strategic reserves in December as the final tranche of the emergency 180-million-barrel release announced in March. He continued by saying that more barrels will be accessible early next year. However, his efforts had little effect on oil prices. Further SPR depletion, combined with slow production growth, will do little to improve the country's energy security. More crucially, it has left the Biden administration with little choices for dealing with high gas costs.

A embargo on US oil exports is one of the last-ditch measures available to reduce rising fuel costs. The decision by OPEC to restrict output has increased pressure on Congress to reinstate an oil ban. This comes at a time when the United States is exporting more oil than ever before. Shipments of refined goods reached a new high of 7 million barrels per day in the first week of this month, thanks to robust demand from Europe following Russia's invasion of Ukraine. In the six years since the restriction was lifted, crude shipments have increased by approximately 600%. Over the last four weeks, US crude oil exports averaged 4 million barrels per day, up 50% over the same period last year.

While Washington may believe that prohibiting oil exports is a cure for its energy pricing concerns, it may have the opposite effect. The proposal has been extensively attacked by oil producers and refiners, who feel it will result in job losses, lower productivity, and higher pricing in the long run. One major flaw in the concept is that gasoline and diesel prices in the United States are decided by global market prices. Because an export prohibition would reduce global gasoline supplies, one would expect fuel prices to climb rather than fall. An oil export embargo would thus be rendered not just ineffectual, but also counterproductive.

Similarly, a planned prohibition on US crude exports would be counterproductive. The US refining complex cannot absorb surplus domestically produced sweet crude. As a result, a prohibition on US crude shipments would not result in increased production of fuel products, and so would have no discernible influence on fuel prices.

Currently, the Biden administration is grasping at straws. Nonetheless, it would be wise to put an end to any potential ban on oil exports. With this drastic alternative off the table, US crude shipments likely set new records in the following months. The growing price differential between WTI and Brent makes US crude-linked grades more appealing to overseas buyers. The spread between WTI and the European benchmark is approaching $8/bbl, up from roughly $6/bbl at the start of the month. At the same time, when a restriction on Russian oil imports takes effect, European demand for US crude should rise. The United States may have lost control over global oil prices, but it can take heart from its growing presence in the global export market.

Tomorrow we will go over the markets price action and where we think it's going over the next few weeks leading into the midterm elections

Thanks for reading todays newsletter! Next one goes out tomorrow