The massive sell-off due to concerns about the delta variant of the coronavirus seems to be taking a back seat to concerns once again about tightening of the global oil supply. The Wall Street Journal reported that, “the highly contagious Delta variant of Covid-19 doesn’t pose an immediate risk to the strength of the U.S. economic recovery, with analysts expecting a robust expansion to continue in the second half of the year.” And if indeed that is the case, then it’s clear that the sell-off in oil on that tumultuous Monday was way overdone and that is why we’re seeing prices recover quite impressively.
While we did see a surprise increase in crude supplies breaking eight weeks of declines, it was caused in part by a big surge in imports that may have been overstated due to the 4th of July holiday reporting period. The EIA reported that U.S. commercial crude oil inventories increased by 2.1 million barrels from the previous week. At 439.7 million barrels, U.S. crude oil inventories are about 7% below the five-year average for this time of year.
The market is starting to focus on the rate of decline in oil supply at the all-important Cushing, OK delivery point. Market watcher Tim Dallinger pointed out that Cushing’s levels have now fallen below the lowest level we have seen in the last five years except for 2018. He says that we can expect another 8ish week of draws for the summer driving season. The trajectory likely arrives at a storage level that is very tight operationally.
So if Cushing drains, Midwest refiners are going to have to look elsewhere for oil and that may be one reason we are seeing an uptick in imports. U.S. oil producers are not rising to the occasion and so we’re becoming more and more dependent on foreign oil. It also means that gasoline prices are probably going to continue to stay strong and while we might see a little set back, the trajectory for retail prices is still going to be strong as we get into August. The EIA reported that gasoline inventories decreased by 0.1 million barrels last week and are at the five-year average for this time of year.
It is also notable that we saw an increase in distillate demand last week. The increase in demand was probably due in part to the jet fuel sector of the distillery inventory which is seeing demand jump as air travel has hit the highest level since the covid 19 shut down. This is key to the oil demand recovery because this is the only sector, as far as demand is concerned, that hasn’t hit pre covid levels. The EIA reported that distillate fuel inventories decreased by 1.3 million barrels last week and are about 4% below the five-year average for this time of year.
The way things are happening with all the stimulus in the global economy, it’s clear that unless the delta variant starts to shut the economy down we’re going to see oil demand around the globe hit record highs. This is coming at a time when governments are trying to reduce their investment in fossil fuels and trying to get more green. The combination of less investment and surging demand is going to have an obvious outcome. The price of oil is going to be strong and it’s going to continue to drive higher so we are in a super cycle for the crude oil market.
I still have a lot of questions about whether world leaders understand what their policies are doing to the price of oil. The recent approval of two pipelines from Nord Stream by the Biden administration seems to cede control of and energy dominance to Russia. It puts Europe at risk. At the same time Russia and their close relationship with Saudi Arabia is allowing them to become the superpower of global energy.The rush to get off fossil fuels in energy policy made by a politician is going to leave the market undersupplied giving more power to Russia, OPEC and the rest of the crew. These countries understand that energy dominance is key and fossil fuel is still a major part of our future whether we want to deny that or not.
In fact, in an excellent piece by Javier Blas of Bloomberg in a story about Saudi Energy Minister Prince Abdulaziz bin Salman who vows that, “We are still going to be the last man standing, and every molecule of hydrocarbon will come out.” this is the energy minister that launched the oil price war that brought the global energy market to its knees and probably engineered the crash in prices below zero. This is the man that tamed the shale oil producers and now will benefit as the Biden administration’s rush to green energy.
U.S. consumers are going to bear the brunt of this energy turbulence. John Kerry is pushing more U.S. taxpayer money to go to poor countries to help them develop green energy. Joe Biden is trying to placate Ukraine as with the approval of the Nord Stream pipeline that puts the country at extreme risk but will at least give them some money for some green energy projects. I’m sure that’s going to make Ukrainian president Volodymyr Zelensky Ukraine sleep a little bit better tonight as I’m sure he is thinking that his country might get invaded and they could lose sovereignty but at least they’re going to be a bit more green. Thank you, Biden.
Joe Biden is very interested in reversing President Trump’s policies especially when it comes to Iran. As much as Biden wants to get back to the Iranian nuclear deal, I think he realizes that the old deal was flawed. If the Iranian nuclear deal was such a good deal, then why can’t we just go back to where we were. It is very simple. Because the Biden administration realizes that if we go back to the old deal, Iran will be allowed to develop missile technology and eventually deliver nuclear warheads in the coming years. Iran does not want to back off their missile program nor do they want to back off their nuclear ambitions. While the Biden administration threatens that if Iran does not come back to talks and make an agreement, they will sanction their Chinese oil exports which is their economic lifeline.
Iran does not seem to be too worried. The AP reports that, “Iran Thursday began exporting crude oil for the first time in the Gulf of Oman, bypassing the strategic Strait of Hormuz.During a ceremony marking the inauguration of the project, President Hassan Rouhani called the plan “strategic. ”Iranian state media described the move as an indication that sanctions imposed by the U.S. were being defeated. Washington placed sanctions on Tehran after former U.S. President Donald Trump pulled his country out of a nuclear deal between Iran and world powers.The project, which began in 2019 and will cost some $2 billion in total, helps Iran lessen its dependency on its main oil export terminal on the Persian Gulf island of Kharg. The shortcut also reduces transportation and insurance expenses for oil tankers.The facility currently allows the pumping of some 30,000 barrels of crude into tankers per hour, via a floating anchored offshore jetty, or single point mooring. It is located some seven kilometers (4.7 miles) off the coast.“82% of this project has been completed and so far more than 1.2 billion dollars have been spent on this,” Oil Minister Jan Zanganeh said.
China is still taking steps to cool off the oil market by probably using Iranian barrels. Bloomberg reported that China offered millions of barrels of oil from its strategic state reserves this month in an unprecedented move to try and quell inflation brought on by rising costs of everything from food to fuel.The country will supply about 3 million tons — or 22 million barrels — to major refineries, according to people with knowledge of the matter, who asked not to be identified as the information is sensitive. The decision is the latest in a slew of measures by the world’s second-largest economy to rein in skyrocketing costs caused by a post-pandemic economic recovery.
Natural gas continues to surge on record LNG exports, lower production and good old-fashioned hot weather. This is a market that probably is in a long-term bull cycle as well though we could cool off if temperatures do.
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