Is oil ‘back from the dregs’?

Good morning from Texas . . . where it is still hot.

I officially started a new role as Houston correspondent yesterday. I’ll still be focused on energy but also covering wider corporate, economic and political happenings in Texas. 

Thanks to all of you who got in touch last time I was in town with tips on brisket and beyond. My inbox remains open for any and all thoughts on where to eat and drink and how to avoid sunstroke — as well as oil patch gossip: [email protected].

You can also follow me on Twitter at @mylesmccormick_.

Before we get started, don’t miss this great read from Derek, James and Amanda. Joe Biden has brought back a muscular approach to government in the US. Will it pay off politically?

Elsewhere, developer NextDecade gave the green light to its $18.4bn Rio Grande liquified natural gas export facility on the Texas Gulf Coast yesterday — making it the third such project to reach the “final investment decision” milestone this year amid a scramble for American gas.

The oil price is in focus in today’s newsletter, as Brent edges back above $80 a barrel. Can the recovery last?

Amanda reports on the stand-off between US auto giants and unions as the electric vehicle push hits industry. Another sign the transition will not be plain sailing.

And in Data Drill, Miguel charts how US natural gas demand in power generation is set to scale record highs this year as Americans crank up the air conditioning.

As ever, thanks for reading. — Myles

Oil marches higher

Crude is back above $80 a barrel. 

Brent climbed less than 1 per cent yesterday to settle at $80.11, which might not seem like a big deal. But crossing the $80 threshold marks a step-change from the doom and gloom of recent months as traders wrestle with a steadily tightening market.

Yesterday’s shift was driven in a large part by data showing US inflation is falling — weakening the dollar and suggesting the Federal Reserve’s war on prices is working.

But Brent is now up about $8 this month. That suggests that Opec+ and (more importantly) Saudi Arabia’s attempts to engineer a price rise are beginning to take effect. 

For much of the first part of the year, oil traded in a per barrel range of high $70s to high $80s, before the failure of Silicon Valley Bank and the ensuing banking fallout and recessionary fears gave it a bit of a battering. 

After some jitters, it found a home for the past two and a half months in a new, lower range in the mid-$70s. As of yesterday, it has broken free of that cage. 

“We’re now back into the lower end of that higher range, which on one level sounds really finicky and silly but on the whole I think it is the first stage of oil coming back from the dregs of where it’s been to date,” Rory Johnston, head of consultancy Commodity Context, told ES. 

Have the market fundamentals changed? For the most part, no: the bear case outlined by Citi’s Ed Morse in this newsletter some weeks ago remains intact. Chinese demand has yet to roar back; there are lingering transition fears; and on many levels there is still a fair bit of oil around. 

But it appears that the voluntary cuts announced by Opec+ in April plus the 1mn barrel a day Saudi cut announced in June (which was extended last month) are having the desired effect. 

Does it continue to climb from here? Probably. (At least that seems to be the consensus). But the rise will likely be somewhat lethargic.

Vikas Dwivedi, global energy strategist at Macquarie, said that the Opec+ cuts coupled with increasing refinery runs had begun to “tighten balances” in the market — putting upward pressure on prices in the near term. 

And Fatih Birol, head of the International Energy Agency, this week reiterated the agency’s view that the global market is set for a tightening in the second half of the year.

The US Energy Information Administration said this week that it expects an average Brent price of $80 in the final quarter of the year and an average of $84 in 2024 — as stockpiles slide.

“The Brent crude oil spot price in our forecast gradually increases in the coming months, reflecting our expectation that global oil inventories will decline,” the EIA said. “We expect the production cuts and rising demand to increase prices going forward.”

Then again, the EIA also said yesterday that US inventories had grown by almost 6mn barrels last week — defying expectations of a gas-guzzling July 4 holiday. If stockpiles keep building, the price recovery will be shortlived. 

“There definitely do continue to be headwinds on the macro side globally. I think if it wasn’t for the Saudi cut we would still be in a very bearish environment,” said Johnston. “We’re not out of the woods yet.” (Myles McCormick)

Historic US union talks show cracks in Biden’s clean energy push

The United Auto Workers will kick off contract negotiations with Stellantis, Ford and General Motors today — discussions that will shape the future of the US auto workforce. 

UAW, the largest US auto union, represents 150,000 workers at the three largest carmakers. Its push for better pay structures and job security come as the move towards electrification risks job losses and a decline in unionised work.

“This is our generation’s defining moment. It’s our obligation not only to ourselves and the working class, but to future generations to fight for and win economic justice,” said UAW president Shawn Fain in a livestream on Tuesday. 

The contract talks are an example of the tensions facing President Joe Biden as he tries to green the economy while ensuring that workers do not get left behind. The UAW has been a vocal critic of how the White House has implemented its signature climate law, the Inflation Reduction Act, and has so far withheld its endorsement of the president for re-election. 

“We must . . . make sure that any of the workers who lose their jobs as a result of the shift to the electric vehicles have a place to land. That means a right to the jobs that are being created and a right to the proper training,” Mike Booth, UAW vice-president, said at a recent town hall.

While a draft version of the IRA’s electric vehicle tax credit required union labour, the provision was removed in congressional negotiations.

Roughly 6 per cent of the US auto workforce is unionised, slightly below the national average, according to the Department of Energy. Because electric vehicles require fewer parts to produce, the move away from gas-guzzling engines risks job loss in the auto sector, with Ford chief Jim Farley expecting 40 per cent fewer workers. Many electric vehicle and battery plants are also being built in the less union-friendly south rather than the rustbelt. 

“The energy transition comes with winners and losers. The idea of creating green jobs for unions may sound really appealing on the campaign trail, but when it comes down to which jobs in which places, it can be really complicated in real life,” said Kevin Book, managing director of consultancy ClearView Energy Partners, warning that the union tensions could hurt Biden’s bid for re-election in crucial swing states.

Mark Wakefield, global co-head of automotive and industrial practice at consultancy AlixPartners, said there’s a “high likelihood” of a strike when contracts expire in September, which could cause pain to suppliers. 

“The status quo is unsustainable from the union side, and the automakers haven’t done themselves a lot of favours in setting themselves up for a quick and easy negotiation,” said Wakefield. (Amanda Chu)

Data Drill

Scorching temperatures this summer will drive US natural gas demand for electricity to a record high as Americans try to keep cool. Increased air conditioning use is expected to result in 4 per cent higher natural gas consumption compared with last summer, according to the Energy Information Administration.

The EIA’s forecast comes as global temperatures reach unprecedented levels and concerns grow over the reliability of the ageing grid. Two-thirds of the North American population is at risk of power shortages this summer during periods of extreme heat, the North American Electric Reliability Corporation, a non-profit, warned in May.

Despite the uptick in natural gas use, more renewable power is also expected to be generated. The EIA expects 23 per cent more solar generation this summer compared with last summer. Natural gas will make up the bulk of electricity generation, comprising 46 per cent of power demand. (Miguel Johnson)

Power Points

Energy Source is written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.