This week, we add a new feature for the #hottakeoftheday newsletter we are calling “Around the Horn.”  Mark Rossano, Ellen Wald, Ryan Ray and I tackle issues from last week that will have a longer lasting impact in the next month.  Get involved, propose questions, make comments and we will plan on doing a webinar with subscribers as we get further into this.  Subscribe today!

1) With the reduction of production in the US and refineries going off line for up to a month to the tune of a few million barrels a day, does Saudi take the opportunity to fill the gap with production and undo their million barrel “gift to the market”?

DRW: I think Saudi has a lot to balance. Iran rumors with supply potentially coming back, prices having moved 25% since “their gift”, I’m inclined to think something is going to come out of the March meeting that is a surprise. That said, they are selling the 1 mmbo/d out of their own long storage tanks they filled in April when they ramped up to 12 mmbo/d so net-net, they are better off today than in January. I will be interested to see how quickly production and refineries get back up and running in Texas and I could for sure see a big surge of exports coming here in April.

Ellen Wald:  My gut says no. AbS is too proud to go back on his commitment because the risk to Saudi Arabia’s good word could damage future opportunities to push up the market. On the other hand, a direct plea for more oil from the United States or another large or rising consumer like India, could be a valid excuse for the Saudis to increase production earlier than April. The problem I see is that with U.S. refineries out, rising gasoline prices could outstrip rising crude oil prices and an extra 1 million bpd from Saudi Arabia won’t really alleviate that unless it also sends a tanker of gasoline to the U.S. as well. Saudi Arabia could also increase exports by pulling crude oil from storage and still technically remain true to its word.

Ryan Ray: If I were advising them, I would tell them to do whatever it takes to keep the price from climbing anymore. The higher it goes, the sooner the US production will ramp up. If they can keep the price in the $50-$60 range while occasionally touching sub $50, I think that is the sweet spot to keep US production in check.

Mark Rossano:  Even before the blackout, Saudi Arabia increased exports for the first two weeks of February. In January, KSA exported about 6M barrels a day, but so far in Feb have averaged about 6.5M barrels a day. This was a big tell that KSA was going to “ease” their 1M barrel a day cut for Feb/Mar by at least 250k to 500k barrels. Saudi has global storage that they can tap into, and when the cut was initially announced- my first comment was- “Watch production vs exports.” They can talk a great game on balancing the market, but it was unlikely that they were going miss out on pricing. The problem the market faces right now is a divergence between the paper and physical markets. The paper markets have front run inflation and “re-opening” moves as the physical market trades at a discount. Urals are trading at 10 month lows in Northwest Europe, WAF pricing remains weak with price cuts rolling out, and U.S. spreads have widened as refining will be down longer than production. Libya, Urals, U.S., and Nigerian crude is competing in a flooded European market. The only bright spot was in North Sea crude, but those prices have started to soften over the last 4-5 trading days with more pressure on the horizon.

These dynamics will keep KSA maintaining at least 500k barrels a day in cuts, but sets up for another interesting OPEC+ meeting as Russia wants to continue increasing capacity while KSA is taking the position of proceeding with caution. Russia has more to lose as the current market dynamics provides a needed lifeline for U.S. crude and a competitor in their European and Asian markets.

2) Does this give pause to the continued unabated expansion of intermittent sources of wind and solar displacing Baseload sources like coal and natural gas?

DRW:  Beyond the rhetoric, with 29 MW of generation capacity in wind and another 8 MW coming next year, the answer “we didn’t expect the wind to contribute that much in winter” is not a good answer when 20 coal plants have been retired since 2011. Will it change policy or decisions over night? No. But it brings us closer to understanding what a real energy crisis is and I suspect we will see it in full force in California this summer.

Ryan Ray:  No. In our neighborhood, one person is proposing replacing the golf course with windmills and solar panels. The discussion is too polarized. We need to be energy agnostic, and we are not.

Mark Rossano:  Given the current narrative in the market, no- the push will remain for wind and solar capacity to be added into the market. I have no issue with additional renewable capacity being added, but the cost to winterizing assets or provide dual fuel (redundant) back-up has to be factored into the price of a project- especially if we are replacing baseload capacity with it. As I highlighted in my recent article and videos, the baseload problem isn’t just a Texas problem, but impacts the whole U.S. grid and other electrical capacity around the world.

Ellen Wald:  The truth is that wind and solar can never supply base load needs without a major revolution in battery storage. Otherwise, no matter how much wind and solar expand, they can only provide supplemental energy. Where we should be turning our attention to for base load needs is nuclear power. If the U.S. is serious about reducing emissions for electricity generation then it needs to make a serious turn towards nuclear power, both large reactors and small modular reactors.

3) China is looking at “rare earth” export restrictions which would potentially impact future US PV and battery production? Is the US ready for widespread mining here to make the green dream a reality? Is it possible to develop fast enough to meet demand?

Ellen Wald:  The U.S. isn’t ready for that kind of mining. Regulations make a swift scale-up in mining basically impossible in the U.S. Even with the current tariffs on Chinese-made solar panels, they are still cheaper than American-made ones and, as solar installers report, customers chose the cheaper Chinese ones over the more expensive American ones, even with the humanitarian issues.

Ryan Ray:  HAHAHAHA! Oh, you’re serious? *Straightens tie* No, the US is not ready. Our dependence on green technology from overseas is a bit rich since the EPA stops at the US’s shores. I wonder how many people know what is involved in the mining process?

Mark Rossano:  This topic is something I have been covering for years now- especially when China stopped exports of rare earths to Japan in 2010-2011. China has a lot of sway over this market given their control on the supply chain and manufacturing of key components that go into everything from renewables and EVs to every electronic and missile we make. President Xi called for new policies in 2019 (at the height of the trade war) to leverage China’s control over this vital supply chain:

The draft regulations:

• Tag rare earths as a strategic resource with relevance to national security
• Reiterate that MIIT, along with the National Development and Reform Commission and other relevant agencies, will set rare earths mining and processing quotas
• Stipulate that the central government may restrict production of rare earths on the basis of the above quotas
• State that rare earths will also be subject to export control laws
• Mandate that adequate strategic reserves be maintained
• Call for a traceability system to be implemented

DRW:  It’s been convenient that a lot of our emissions and mining have been offshored to Asia and other manufacturing hubs, but when it happens in the land of the free, like installing overhead power transmission lines for wind, locals won’t like it. The oil sands get huge play about their environmental footprint here and I always ask … “have you seen a lithium mine?”

4) What do you make of the US announcement that they will engage Iran in some form or fashion?

DRW:  Sanctions are meant to change behavior and unlike the previous “Twitter in Chief” we won’t see US- Iran negotiations play out on social media. Iran needs the revenue and from a humanitarian standpoint, 83 mm are being punished for the sins of their leader. I think their is a way President Biden gets a win and both sides save face from the rhetoric we saw last week about who bends first. I don’t know what that deal looks like – but I fully expect one to be put in place and Iran to begin “officially” selling oil to the world again.

Ellen Wald:  It is not surprising given the Democratic Party’s strong commitment to rejoining the JCPOA. However, it is telling that the sanctions on Iranian oil have not yet been formally relaxed. It does seem that OPEC, at least, is preparing for a time when Iranian oil may legally enter the market (there is a fair amount of Iranian oil entering the market clandestinely). OPEC+ has reached out to Iran and invited its oil minister to attend the next JMMC ministerial meeting. It is likely that OPEC+ sees the need to start preparing for the return of Iranian oil to the market and is hoping to make sure the return does not “rock the boat” too much.

Ryan Ray:  I’m hopeful. Our Middle East foreign policy is a disaster. Now, I’m not confident that Biden will get the right deal, but our current relationship with them is getting nowhere. Also, it didn’t stop Iran from doing a deal with China last fall. So, who are we hurting? The average Iranian family.

Mark Rossano:  The Iranian Nuclear Deal is back in the headlines with both Iran and Biden’s Administration making comments on what would be required to lift sanctions and re-enter the JCPOA. Iran has been exporting about 2.1M-2.4M barrels a day with their declared production sitting at about 2.07M barrels a day. Iran has about 80M barrels of onshore storage that is about 50%-60% full at the moment, and could quickly be pushed into the market if the deal is signed. Iran was producing about 3.83M barrels a day before the Trump Administration left the nuclear agreement. Iran has been bringing back some additional capacity since the end of 2020, with more STS (Ship to ship transfers) happening off the coast of Malaysia. “U.S. Secretary of State Antony Blinken said Washington was ready to explore the possibility of reopening nuclear talks with Iran, even as the U.S. readies military contingency plans in the region. The head of U.S. Central Command said the military is exploring the use of bases, including those in Saudi Arabia, that can operate during “periods of heightened risk.” Defense Secretary Lloyd Austin, who condemned recent attacks on Saudi Arabia by Iran-backed Houthi rebels, also discussed bilateral ties and defense cooperation with Saudi Crown Prince Mohammed bin Salman.”

Iran has stated that the U.S. must first return to the JCOPA deal and lift sanctions before any talks can begin between both parties. “Earlier Foreign Ministry spokesman Saeed Khatibzadeh said the “key sequence” for engagements between the two nations was commitment, action and then a meeting.” “The United States would accept an invitation from the European Union High Representative to attend a meeting of the P5+1 and Iran to discuss a diplomatic way forward on Iran’s nuclear program,” State Department spokesman Ned Price said in a statement. The P5+1 refers to the participants in the nuclear deal with Iran: China, Russia, France, the U.K., the U.S and Germany.” In the meantime, Iranian assets in Iraq have launched several attacks on NATO and Iraq assets resulting in the injuries and death of several contractors. Even during these negotiations and political “dance”, we must meet all of these threats and attacks to our service men and women with unrelenting force. We are witnessing the lashing out of politically and financially wounded animal, and it would be a mistake to adjust. The general populace in Iran is against the regime and IRGC, which has been solidified with the amount of internal attacks on highly sensitive targets. Their government and intelligence community is leaking like a sieve, which is providing valuable information.

I still believe that this is the Biden administration testing the waters to see what kind of response and reaction comes from the Iranian side. The response shouldn’t really surprise anyone, and I think the U.S. will wait to see how the elections go at the end of the year. The U.S. and its allies in the region have been fairly successful in stressing the balance sheet of the Iranian regime. This has put pressure on the “Shia Crescent”, which has caused Iranian proxies to increase activity against U.S., NATO, and western assets. It would be a mistake to relent now as public support within Iran remains in favor of the west, and the regime is losing more control of those internally. Obviously, predicting a regime change is near impossible, but the locals are getting more brazen in their attacks against secured assets in the country- most recent being the head nuclear scientist.