There is no progress in the OPEC plus production increase and that is starting to become very bullish. The International Energy Agency (IEA) is warning that if the OPEC plus deadlock persists and production limits remain at July levels, the oil market is going to tighten dramatically. The assessment by the International Energy Agency is the latest warning that the world needs more oil and if it doesn’t get it soon, we’re going to see a significant price increase. I wonder where we’ve heard that before? Ah yes, it was The Energy Report. You read it here every day!
The IEA says that they expect oil consumption will increase by 5.4 million barrels a day in 2021 and then another 3 million barrels per day in 2022. They also say that volatility does not aid the energy transition and it is not in the best interest of the producers or the consumers. The IEA warns that the most important negative risk to oil prices is the escalation of covid cases in several nations. Because of that, the IEA says that the crude market faces “the prospect of a deepening supply deficit. With the global oil market has now used up the supply glut it accrued at the start of the pandemic, potential inflationary pressures could damage the fragile global economic recovery.”
This, of course, is the same agency that just a few months ago called for the world to stop investing in fossil fuels to meet climate change goals. Now the reality of the lack of investment in fossil fuels is already showing its ugly head. Risks are rising that bad energy policy could damage the global economic recovery. The IEA put OPEC+ crude production up by 450,000 barrels a day month over month to 40.90 million barrels a day in June.
Bad energy policy is causing increasing inflation pressure and the rush to stop investment in fossil fuels could be adding to the price spike and human misery. The United Nations on Monday said it saw “dramatic worsening” of world hunger last year, saying much of that is likely connected to the pandemic. A report issued jointly by five UN agencies said hunger outpaced population growth in 2020, with nearly 10% of all people estimated to be undernourished. It said the sharpest rise in hunger came in Africa, where 21% of the people are estimated to be undernourished as reported by the New York Post. Higher fuel costs make it more expensive to produce and transport food, another reason we should have a better plan for fossil fuel transition.
It looks like a turnaround Tuesday is underway! We expect to see a pretty good crude oil draw in tonight’s report of over 4.0 million barrels. We also expect that we will see a drop in gasoline demand from record levels. As we’ve pointed out, many times when we see a big run up in prices ahead of the 4th of July, the holiday acts as a crescendo type of a peak for prices in the short term, Then the market works off some of its enthusiasm and starts to consolidate for another move higher. This is a pattern that we used to see in the 90s when we had a very tight market where demand was exceeding supply.
Distillate fuel should also get a boost as we are seeing the highest travel levels by air that we’ve seen since the pandemic and goods moving around the country should keep diesel prices supported.
The market is going to look at the inflation numbers that we get today. As far as consumer prices, we know that gasoline prices have already had a big impact on consumer’s pocketbook. Often over looked in the past is the food and energy sector of the CPI and it is going to be looking more inflationary. That may be raising problems for the Federal Reserve.
The Wall Street Journal reports that, “Federal Reserve Bank of St. Louis President James Bullard is ready to start slowing the pace of central bank bond-buying as soon as his colleagues are, worried in part that the purchases risk overheating the gangbusters housing market. “I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,” Mr. Bullard said Monday in an interview with The Wall Street Journal. When it comes to the outlook for the Fed paring its purchases of Treasury and mortgage bonds, “we do want to do it gently and carefully, but I think we’re in a very good position to start a taper. I don’t need to get going tomorrow, but I think we’re—I think we’re in very good shape for this” once the collective membership of the Federal Open Market Committee is ready to act, Mr. Bullard said.
Oil could also pull back if we get into a taper tantrum type of situation. If the market feels that the Fed is being too aggressive, that could slow down oil consumption and oil demand expectations. At this point, in the short term, it’s hard to imagine a situation where demand could slow down enough to catch up with supply. Of course, anything could happen but that is unlikely.
Natural gas had a breakout move again yesterday to the upside and while the range is relatively slow, we still think that there is significant upside risk to the natural gas market. LNG demand is very strong and U.S. production is not what it used to be. Now throw in a few weather issues and the storage at the end of the season is going to be the lowest that we’ve seen for a while. The Energy Information Administration reported last week that supplies of natural gas are 17.6% below a year ago and 6.9% below the five-year average.
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