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Oil Looking Bullish, President Biden, PM Boris Johnson, and EU Looking Foolish

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29 comments on Oil Looking Bullish, President Biden, PM Boris Johnson, and EU Looking Foolish

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WTIC chart courtesy of StockCharts.Com annotations by Mish

Technically speaking, an ascending triangle is a bullish pattern. The same pattern exists on the North Sea oil Brent Crude contract.

Brent Crude 

Brent chart courtesy of StockCharts.Com annotations by Mish

Both patterns are the same technically. 

It’s interesting to see WTIC at near parity with BRENT. Typically BRENT is higher. Now it’s 115.07 for WTIC and 115.60. 

Brent to WTIC Ratio 

BRENT to WTIC ratio courtesy of StockCharts.Com annotations by Mish 

Bullish and Bearish Cases 

Bearish: The Fed is hiking, the ECB is poised to hike, liquidity is drying up, the entire world is on the verge of recession

Bullish: The war in Ukraine and totally inept responses and sanctions by governments,

Central Banks vs Politicians

Actions by central banks are bearish for oil but actions by governments are bullish.

Let’s discuss the politics.

U.K. Introduces Temporary ‘Windfall Tax’ of 25% on Oil and Gas Profits

If you want less supply and higher prices increase taxes. That is what progressives in the US demand, and what UK Prime Minister Boris Johnson did.

Please note U.K. Introduces Temporary ‘Windfall Tax’ of 25% on Oil and Gas Profits

The British government unveiled a 15 billion-pound emergency aid package on Thursday featuring a 25 per cent tax on profits at oil and gas firms, to help offset increases in the cost of living.

Treasury chief Rishi Sunak said the government would introduce the temporary windfall tax which is expected to raise 5 billion pounds (more than $8 billion Canadian) over the next year to help fund cash payments to help millions of people cope with sharply rising energy bills, Sunak said.

Hooray! More free money. Inflationary madness continues, and it will be hard to take back. 

Meanwhile, Bloomberg reports Prime Minister Wants More Investment in Oil, Gas, Renewables

Excuse me for pointing out that you do not get more investment in oil and gas with a 25% tax on profits!

Echoing my comment, British Petroleum responded that it would have to look again at its investment plans in the UK because the chancellor’s new levy is a “multiyear proposal” rather than a “one-off tax.”

Biden Doing Everything Possible to Drive Up the Price of Oil, Some of It’s Illegal

On March 22, 2022, I commented Biden Doing Everything Possible to Drive Up the Price of Oil, Some of It’s Illegal

Expect Higher Gas Prices

With Biden sanctioning Russian gas, and with energy being mostly inelastic, don’t expect too much relief at the pump.

Do expect more energy nonsense from Elizabeth Warren and president Biden.

I believe the scorecard on the above sentences is three of three.

Let’s flash forward to today.

New EU Embargo of Russia Proposal 

Also note EU Spares Pipeline Oil From Russian Embargo Plan to Break Logjam

The European Union proposed banning seaborne oil from Russia while delaying restrictions on imports from a key pipeline in an effort to satisfy Hungarian objections and clinch an agreement on a stalled sanctions package that would target Moscow for its war in Ukraine. 

Member states would phase out their imports of seaborne crude in six months and refined petroleum products in eight months, said the people, who asked not to be identified because the discussions are private.

The proposal would give more time to Hungary, which has opposed the deal, to find a technical solution that satisfies its energy needs. It would also address the concerns of other landlocked countries, including Slovakia and the Czech Republic.

Exempting pipeline oil from the measures — which Hungary had previously asked as a condition to back the package, along with more time and infrastructure investments — will dent the impact of the sanctions. Russia shipped about 720,000 barrels a day of crude to European refineries through its main pipeline to the region last year. That compares with seaborne volumes of 1.57 million barrels a day from its Baltic, Black Sea and Arctic ports.

More Sanction Madness 

This is more sanction madness. I do not know if Hungary will go along but Germany to Stop Russian Oil Imports Regardless of EU Sanctions

I will believe that tidbit about Germany when I see it, but no doubt that is the goal. 

Unless Saudi Arabia or other producers pump more oil, the EU’s needs have to come from somewhere. 

Supply Chain Madness

Global map from Nations Online Project, annotations by Mish

Supply chain disruptions are already madness, as I described previously. 

Meanwhile, please note Greece Emerging as New Hub for Russian Ship-to-Ship Fuel Oil Exports.

The Greek energy ministry declined to comment on what it said was private companies’ business.

Also Russian Oil Producers Start Using Tankers the World Didn’t Want

New Oil Route courtesy of Bloomberg

And instead of getting oil from Russia, the EU will use that white line in reverse to get oil from Saudi Arabia!

Synopsis

  • Russia bought cheap tankers and uses ship-to-ship transfers to avoid sanctions
  • Oil travels thousands of miles instead of hundreds of miles. 
  • China, Greece, and India are all willing to buy Russian oil but the longer route bumps up the price.
  • The same applies to the EU over a reverse path.

Added Bonus

Hoot of the Day

This massive inefficacy is something only politicians on three continents could design.  

As a direct result, more money than every is flowing into Russian coffers. And the final kicker is the Russian rubble is now the strongest currency in the world vs the US dollar in 2022.

I believe this qualifies as Hoot of the Day.

Question of the Day

So what will it be, politicians or central bankers? 

Place your bets. By the way, think about the possibility of one now and one later. 

This post originated at MishTalk.Com.

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Mike Shedlock

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29 Comments
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Christoball
Christoball
3 years ago
I notice that traded volume of crude oil is about half of what was traded before the pandemic. Are major producers of oil just able to process and market it on their own and have no need to trade??? Are most of the trades just selling smaller producers inventories who do not have refining and/or marketing outlets of their own???? Any thoughts on this??? This is a huge drop!!!!!
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RonJ
RonJ
3 years ago
“Biden Doing Everything Possible to Drive Up the Price of Oil, Some of It’s Illegal”
So much for Pelosi saying that no one is above the law, even the president. She refuses to impeach Biden.
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Eddie_T
Eddie_T
3 years ago
I continue to be fully invested in Canadian O&G E&P’s and uranium (I’m favoring physical and flagship names in this bear market).
I sold the miners at year end, but I’m starting to buy back in. Bear markets are a great time to buy good resource companies at a discount, imho.
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TexasTim65
TexasTim65
3 years ago
Reply to  Eddie_T
Welcome back Eddie.
It’s been a while. Hope everything is OK on your end and you’ve just been too busy with life to post.
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MPO45
MPO45
3 years ago
Reply to  Eddie_T
Welcome back Eddie. You have been missed.
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MPO45
MPO45
3 years ago
Gas is already hitting $5 and $6 per gallon in some areas and it’s just the start of the driving season.
cha ching $$$$$
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PapaDave
PapaDave
3 years ago
Reply to  MPO45
Good article. It mentions that US refining capacity has dropped by 1 million barrels per day over the last few years. No one took much notice during the pandemic as demand dropped as well. But now that demand is coming back, the supply/demand imbalance is showing up at the pump. It appears that current prices are causing a bit of demand destruction, but not enough to stop prices from rising. Maybe balance will return at $6 or $7.
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PapaDave
PapaDave
3 years ago
“So what will it be, politicians or central bankers?”
I don’t see it as a binary choice. I see many more variables in the mix. Though your two factors are both important.
1. politicians: Putting sanctions on Russia is a long term threat to oil supply. It doesn’t matter if Russia works hard to sell more oil and gas to China, India or anyone else. It doesn’t matter if they buy tankers or build more pipelines. What does matter is that Russia needs foreign expertise, equipment, and parts to keep the production flowing. Russia produces about the same amount of oil as Saudi Arabia. Saudi does it with 2000 wells. Russia does it with 40000 wells. That requires a huge amount of resources to maintain. Resources that they are now being starved of. My expectation is that Russia will lose the ability to keep production levels where they want them, and that they are going to suffer a long slow decline in production over the next year or more. Probably a decline of 2 Mbpd this year and another 1 or 2 Mbpd next year. Some fields will be forced to shut down, and once that happens, it is very difficult to bring them back on line when the vast majority of their fields are so marginally useful.
2. Central bankers: Will central bankers drive interest rates so high around the world to cause a severe global recession which crushes demand for oil? I have no idea, but my best guess is no. A global recession would have the same impact on the economy as the recent pandemic, and we all know how central bankers responded to the pandemic. I find it difficult to believe that after working so hard to prevent a very serious recession caused by a pandemic, that central bankers would now deliberately push us there. That makes zero sense to me.
So if you want me to choose, I will say that politicians will continue to add pressure to oil prices, by restricting supply. But that isn’t the whole story. In fact it leaves out the most important factor of all.
3. Oil companies: After spending a decade borrowing and spending like drunken sailors to expand production and reserves, many oil companies destroyed or almost destroyed themselves by providing too much supply compared to demand. Prices dropped and companies were forced to cut back on capex spending. This reduction in capex has been going on for many years now, which has set a pretty hard stop on new supply. At the same time, the ESG movement has put further constraints on the industry, resulting in many governments, bankers and investors abandoning the industry. Which brings us to today. A time when demand has reached all-time highs while production is slowly declining. The oil companies find themselves being marked as bad guys because they produce oil, a dirty, global warming product that many want phased out. And they find themselves as bad guys for deliberately not producing enough oil to keep prices in check. Talk about being caught between a rock and a hard place. So what are they going to do? Exactly what they keep telling us they will do. Spend as little capex as possible to maintain current production. Reap the rewards of current high prices to pay off debt, buy back shares and increase dividends to shareholders. They have no desire to spend a lot of money to explore for more oil that no one will need 20 years from now and they will be vilified for. And even if governments suddenly decided to provide incentives for new exploration (as opposed to extra taxes on profits), and the oil companies went along for the ride, it would take 5-10 years to see the results.
And a couple of smaller factors.
4. Nuclear: After Chernobyl and Fukushima nuclear expansion stopped. Yet demand for electricity keeps growing. And even though we are building a lot of renewables, it isn’t enough to meet demand. So we keep needing to use more oil and gas power plants.
5. Electric grids: we need to spend trillions to expand and update the grids all around the world in order to successfully transition from fossil fuels to a future of renewables. We are moving much too slowly on this, which will only make it harder to transition quickly away from fossil fuels for transportation, which is 27% of oil consumption.
6. SPR releases: even with all the current SPR releases around the world, inventories continue to drop and prices keep going up. Eventually the SPR releases will end and governments will have to start refilling them. What will that do to the demand/supply balance?
Lots of other factors as well.
Net result. Too much demand, not enough supply, higher prices.
Prices will have to keep increasing until supply and demand are in balance again. I have read a variety of numbers for when that will happen, from a low of $130 to a high of $220.
In the meantime, the oil companies I own shares in are trading at discounts of 70% to normal valuations, based on $100 oil. The price is $115 today. What will it be in a few months as summer travel begins and demand goes even higher? Will the oil stocks start to revert to more normal valuations? That implies a tripling of share prices at $100 oil. How about at $150?
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rk6
rk6
3 years ago
Reply to  PapaDave
“Russia needs foreign expertise, equipment, and parts..” So you think the Russians will never learn and will be permanently dependent on the west for technical knowhow? What do you think will happen in a year when there is a need for such skills? Also, let me guess, you think the US educational system that produces these experts is forever and always superior to the Russian/Chinese/Asian etc. technical systems. Guess that’s why we are the only country to have hypersonic missiles. And yes, we know you have oil company shares as it seems you remind everyone in every damn post you make.
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PapaDave
PapaDave
3 years ago
Reply to  rk6

Any nation can become self reliant given enough time and investment. Russia could become independent in every area necessary for oil production with a herculean effort in about 10 years. And I agree that Russians are just as smart as Americans, Chinese etc. Though it would appear that many highly skilled Russians are leaving the country for better futures elsewhere.

Just as US automakers could produce all components of their automobiles in house, rather than rely on other companies all over the world to help them, but at what cost, and what time frame. Its isnt a switch that you can just flip on. And if you are being deliberately denied a few critical components that you can’t make yourself (say highly specialized computer chips) you can’t make the car, in spite of being able to produce the other 99%.

It will take Russia a long time to become self reliant and production will begin to lag during the long transition period.
Regarding my focus on oil, I am merely paying it forward. I learned about the fabulous investment opportunity from others here last year. Since those folks are no longer posting, I feel I owe it to them to try to help others recognize and take advantage of this rare opportunity to invest in a very undervalued sector. If you do not like my posts, feel free to ignore me. I won’t be offended.
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prumbly
prumbly
3 years ago
Reply to  PapaDave
Actually Russia gets 50% of their drilling rigs and other drilling equipment from… Russia. And 30% from China. Very little from the West.
Funny how the West insists on presenting Russians as incompetent yokels, when in reality they have a long history of scientific and technical excellence. Oh, and they’re clearly winning the war against Ukraine, despite no Ukrainian soldiers ever being killed and all the Russian missiles only hitting schools, churchs and hospitals, and all the Russian tanks being blown up like sitting ducks…
My hoot of the month was the headlines about how the Azovstal defenders would “never surrender”, and then a week later they all surrendered… but the Western media (i.e. the Ukraine Ministry of Propaganda) simply refused to say they surrendered, just saying they “had been evacuated” or some similar nonsense.
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PapaDave
PapaDave
3 years ago
Reply to  prumbly
It sounds like you are cheering for Russia to destroy Ukraine then?
You can read my reply to your comrade, rk6, as the answer is similar.
Using the analogy of a US car company, it doesnt matter if you can produce or acquire 90% of your parts. You can’t complete the car when you are missing 10% of the necessary components.
And it would take many years for Russia to become 100% self sufficient. In the meantime, oil production declines.
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prumbly
prumbly
3 years ago
Reply to  PapaDave
“It sounds like you are cheering for Russia to destroy Ukraine then?” What an odd thing to say. It’s as though you think you can read people’s minds. When did you start believing you had this superpower? Have you seen anyone about it?
Russian oil production isn’t declining. Russia adjusts output according to demand. Always has. Clearly demand has fallen with the US and EU’s ridiculous sanctions, but Russia is adjusting rapidly and has found new buyers among the 80% of the world that isn’t sanctioning them and production is increasing again.
The reality is that Russia is quite capable of producing and pumping as much oil as it wants. At the moment I’m sure they’re quite happy with current production as they rake in the cash with today’s oil prices.
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PapaDave
PapaDave
3 years ago
Reply to  prumbly
They will certainly benefit from high prices. Completely agree there.
But I disagree that they will be able to maintain production as time passes.
Outside of Russia, the oil companies all over the world are already struggling to find enough skilled workers, steel pipe, fracking sand, etc to maintain supply, let alone expand it. And they are not suffering from sanctions like Russia is.
We will just have to wait and see how this plays out over time. But I expect to see Russian production decline.
Not a mind reader. Just interpreting your words that you are cheering for Russia. Am I wrong?
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prumbly
prumbly
3 years ago
Reply to  PapaDave
“Am I wrong?”. Usually. And most definitely in this particular case.
I could care less who rules over some sleepy, remote part of what has nominally been called Ukraine for the last few years. I just want this war to be over. Don’t like wars. Seems absurd for the West to sanction itself over this, destroying its economy in the process and risking escalation into a nuclear war. History is replete with examples of silly little disputes turning into major conflagations (WW1 being a great example).
What are the main factors that cause a little war to become a big war, and do they apply here?
Nationalism, jingoism… check. [US/UK mainly]
Race hatred… check. [Russo-phobia]
A completely dishonest media… check. [Ukraine propaganda, no matter how ridiculous, gets reported as fact]
Massive hubris… check. [You would think we might have been humbled by the realities of Vietnam, Korea, Afghanistan… But no]
The ingredients are all there.
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PapaDave
PapaDave
3 years ago
Reply to  prumbly
Thanks for clarifying. I am not a fan of war either. Unfortunately, there is not much I can do about it.
All I can do is look for opportunities to take advantage of. The invasion of Ukraine and subsequent sanctions on Russia are adding to an already tight supply of oil. Even if the war and sanctions ended today, the outlook for oil prices is still higher, given the supply/demand imbalance going forward.
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FromBrussels
FromBrussels
3 years ago
Reply to  PapaDave
If Prumbly is not ‘cheering for Russia’ ,yours faithfully FromBrussels definitely is , the US of A should ve steered clear of Russia’s legitimate sphere of influence, (ab)using corrupt basket case Ukraine as a battering ram against Russia is simply outrageous, an outright act of war actually ! The US doesn t give a sh$t about Ukrainian cannon fodder and doesn t mind collaborating with Nazi thug to achieve its criminal objectives. Not surprising actually, in Syria you even cozied up with barbarians like Isis and Al Qaeda….in fact the US has become a barbarian nation itself in recent decades …..SLAVA ROSSIYA !
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Maximus_Minimus
Maximus_Minimus
3 years ago
Reply to  FromBrussels
Barbarism yes, but that’s not the only inherent trait of the system.
Intellectual degeneration at the top, a reverse Darwinism of sorts.
They needed to trout out the geriatric Henry Kissinger to come out in favor of an agreement.
Apparently, some might benefit from this intellectual support to voice their opposing opinion. WTF?
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MPO45
MPO45
3 years ago
Reply to  PapaDave
Well said and thanks for the commentary. Let’s schedule a virtual champagne celebration when oil hits $150.
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PapaDave
PapaDave
3 years ago
Reply to  MPO45
Thanks. I’m starting to get the hang of this comment thing. It takes some effort to be concise and not waste too much time.
It would not surprise me if oil gets to $150 this summer. But even at the current $115, the returns to shareholders should be substantial.
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Christoball
Christoball
3 years ago
Reply to  PapaDave
Oil is having a hard time breaking $115 and traded volume is down at those prices. Not as many people want to buy oil at $115.
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PapaDave
PapaDave
3 years ago
Reply to  Christoball
Short term, yes. That is understandable. $115 seems to be a current line in the sand for some. But based on declining inventories, demand is still exceeding supply, even with extraordinary SPR releases at the moment. Since SPR releases will be completed by the end of the year, that temporary supply disappears. And then it turns into extra demand next year as the SPR needs to be replenished.
And as time passes, I expect Russian production to slowly decline.
Demand and supply eventually balance. But since supply will be constrained, demand will have to drop due to even higher prices.
Though higher prices are not necessary for oil companies to produce some pretty amazing cash flow numbers. $100 will do fine. At an oil price of $100, many companies are currently trading at less than 2 EV/CF, when traditionally they trade at 6 to 8. Anything above $100 is just a bonus.
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PapaDave
PapaDave
3 years ago
Reply to  Christoball
Any change in your position now that oil broke through to $117 today?
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RonJ
RonJ
3 years ago
Reply to  PapaDave
1. politicians: Putting sanctions on Russia is a long term threat to oil supply.
Governments attacking fossil fuels, is a threat to oil supplies. Biden attacked fossil fuels, now he complains about the natural effect of higher prices, when he wants less supply anyway.
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Six000mileyear
Six000mileyear
3 years ago
I come up with several Elliott Wave interpretations (both bullish and bearish) for WTIC and Brent oil. The main thing I notice is the choppiness post spike. This definitely represents some sort of consolidation, and could mean more consolidation taking place. I do see some choppy advance off both the April lows, which could mean an ending diagonal (rising wedge); however that would be an extremely bearish chart pattern long term. There is insufficient chart pattern at this time to declare any consolidation complete.
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killben
killben
3 years ago
“British Petroleum responded…”
It would have been still better if they had reduced their production by 25% (equivalent) to show the politicians and the government their place.. Price will go up. Tax will be more. But energy bills go up further. Companies should screw politicians and governments when their policies bite them.
Sanctions on Russia and the idea of isolating Russia was a wonderful idea if you want higher inflation (forget that when the US can attack any country at will) and that it stays that way.This is politicians’ way of saying “war is transitory”
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Zardoz
Zardoz
3 years ago
Reply to  killben
“show the politicians and the government their place”
All rise for the Corporate Anthem
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MPO45
MPO45
3 years ago
I think it was good old eddie_t that lured me to try fastgraphs and i got hooked on it. I plugged all my oil and gas stocks into the tool recently and it shows that my oil stocks could potentially earn me millions over the next 12 to 24 month if the stars align right.
Wherever you are eddie, thank you.
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PapaDave
PapaDave
3 years ago
Reply to  MPO45
Yes. A bonus feature of this great blog, are some of the fantastic people who comment here. They convinced me to purchase a lot of oil and gas shares last year and they are doing great. Thanks Mish. And thanks to all those great folks and their comments!
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