While oil prices struggled after yesterday’s Energy Information Administration (EIA) report, the crack spreads on products just sizzled. Oil products like gas and diesel stood strong as the argument that oil price is weak because of a recession is not holding any water. Even the EIA admits that in the second half of 2023 and into 2024 the oil market will see persistent inventory drawdowns as the demand for oil will be greater than the supply. This is something we predicted would happen long before EIA. And as the Strategic Petroleum Reserve has come to an end, the market seems to be draining supply. Cushing, Oklahoma, which saw a 2.9-million-barrel withdrawal, was roughly reducing inventories in the NYMEX delivery hub by 7.3%. Now with demand exceeding supply, those draws should continue while supplies are still 15.5 million barrels above where they were a year ago. That surplus could evaporate quickly as US refiners wean themselves off of government supply and must face the real world of the coming supply deficit. A supply deficit would have been avoided had the government not meddled in the market.
Demand for both gasoline and diesel bounced back last week as oil demand was far from recessionary. Week over week gasoline demand rose by 99,000 barrels a day to 8.855 million barrels in the demand for distillate fuels rose to 3.669 million barrels, which was up 700,000 barrels a day from the week before. In fact, looking at the four-week average total petroleum product demand came in at 20.3 million barrels a day, up by 1.0% from the same period last year, a time when the Fed thought the economy was too hot.
Gasoline demand averaged 9.1 million barrels a day, up by 4.6% from the same period last year and distillate fuel product supplied averaged 3.4 million barrels a day over the past four weeks, down by 8.3% from the same period last year. Yet Jet fuel demand was 7.2% compared with the same period last year as jets burn diesel on the unbearably hot tarmacs.
As supplies tighten the world becomes more dangerous. Biofuels and ethanol surge as fears that hot and dry conditions across the grain belt will return, reducing yield and reducing supply around the globe. Add to that, Russian failure to renew the Black See Grain accord and the bombing of Ukraine ports adding to the upside risk to prices. Threats by Russia to view any ship leaving those ports to be viewed as hostile or carrying ammunition have halted Ukrainian grain shipments. While those shipments will be moved by truck and rail, it does not make them necessarily safer. Wheat futures, particularly the spring wheat in Chicago, exploded in price.
Reuters is reporting that “Iran would retaliate against any oil company unloading Iranian oil from a seized tanker, the Revolutionary Guards’ navy commander Alireza Tangsiri said on Thursday, according to state media. In April, the U.S. confiscated Iranian oil on a tanker at sea in a sanction enforcement operation, according to a maritime security firm. Tangsiri added that Tehran would hold Washington responsible for allowing the unloading of the tanker’s content.”
What happened to the slowdown in China? JODI reports that:
“China crude imports increased by 1.80 mb/d to 12.15 mb/d. Sounds like a recession to me, not. And China has created and oil miracle by importing more oil from Malaysia than they can produce. China crude imports from Malaysia were at record 1.511mbpd in June (Malaysia crude production is around 0.5mbpd), while China imported zero barrels from Iran and Venezuela in June based on the customs office data."
As Reuters put it, “China’s June fuel oil imports hit the highest level for a month so far in 2023, buoyed by firm purchases of Russian oil, data from the General Administration of Customs showed on Thursday. Total fuel oil imports in June were at 2.70 million metric tons, up 5% from May and more than triple from June 2022.”
So how are those sanctions working against Russia? Reuters reports that, “Russia’s federal budget revenue from oil and gas sales may increase by around 60% in July from the month before to 844 billion roubles ($9.3 billion), largely reflecting a usual cyclical pattern of tax receipts, Reuters calculations showed on Thursday. The rise in income from oil and gas – an important source of budget revenue – will help alleviate the budget deficit, which stood 2.6 trillion roubles in the first half of the year."
And the war against climate change. First, it was wanting to kill all the dairy cows and cattle because they fart greenhouse gases. Now it is cut down all the trees to save the planet. Right? I know! Reports say that almost 16 million trees have been chopped down in Scotland to make way for wind farms. That makes a lot of sense! Cut down those carbon sucking trees so you can put up wind turbines that will end up in a landfill next year. Now you can make the global grain market even tighter by replacing corn, wheat and soybean fields with toxic sun panels that will also end up in a landfill. Just if you drive an electric car that will strip the land of nickel, cobalt, and lithium and make disposable cars that will end up in a landfill faster than an eternal combustion engine because it is too expensive to replace the battery.
So as we look forward, the odds of a supply squeeze are getting greater every day. Resilience in the crack spreads and global demand suggests that the market may be mis-pricing oil as we look out a few months. Pessimism about the economy, uncertainty about interest rates, and a market that became intoxicated with global Strategic Petroleum Reserve releases have left the world with extremely tight supplies. The margin of error is too thin not to have some protection on.
Natural gas also is going to be buoyed by the unrelenting heat and there are growing expectations that we could see some unseasonal draws in natural gas supply. If the heat holds up into August like some are predicting and because we’re seeing a consistent drop in the US rig count, this winter could be more expensive than previously thought by the marketplace.