In September of 1985, the Chicago Bears were embarking on one of the most dominant seasons in NFL history. Hopefully, that will be the case this season. Yet a less favorable comparison to 1985 is the fact that according to the Energy Information Administration (EIA), if you look at the totality of US crude supplies in storage including the Strategic Petroleum Reserve supply, it is at the lowest level since 1985. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 6.3 million barrels from the previous week. SPR barrels are just off the lows from 1983, clocking in at 350.3 up from 349.5 the week before but down from 442.5 million barrels a year ago.
In 1985, oil demand domestically was 15.69 million barrels a day and according to the EIA, the four-week average based on total product supplied is 21.1 million barrels a day, which happens to be up 4.9% from the same period last year. Global demand for oil in 1985 was 63 million barrels a day and today it clocks in at 103 million barrels a day. In fact, based on that metric when you compare supply in inventories based on demand, you could argue that supply in storage is tighter than it has ever been.
That fact is particularly disturbing as there are reports of spot gasoline shortages driving up prices across many Midwest states as the transition from the summer blend to the wither blend is not going as smoothly as it should due to better than anticipated demand but also because the price spike is creating a hardship on many Americans that are falling further behind on their economic dreams as inflation is cutting away at their savings as they drown in debt.
Oklahoma, Missouri, South Dakota, North Dakota, Nebraska, Minnesota, and Kansas are seeing a price spike due to this issue that could see prices spike by up to a dollar and will lead to another post-labor uptick in the National Gasoline Price average.
The supply squeeze caused a big spike in the beleaguered gasoline crack spread that had been taking a back seat to diesel and what was supposed to be the relative calm of the winddown of the summer driving season.
This comes just after the Energy Information Administration reported robust gasoline demand leading up to the Labor Day weekend. The EIA reported that gasoline demand rose to 9,321 million barrels a day up from 9,068 or 253,000 barrels a day higher than the week before and if you look at the four-week moving average it came in at 9.0 million barrels a day, up by 3.0% from the same period last year.
The supply of products is also tight and well below the average range for this time of year. The EIA reported that total motor gasoline inventories decreased by 2.7 million barrels from last week and are about 5% below the five-year average for this time of year. Distillate fuel inventories did increase by 0.7 million barrels last week but are still 14% below the five-year average for this time of year. The drain on supply was expected by us as it was clear that the Biden SPR release to try to control prices would eventually backfire. Not only did it disincentivize US oil and gasoline investment, but it was also an act of oil war against OPEC led by Saudi Arabia and its favorite co-conspirator Russia.
Not only did this crew extend production cuts until the end of the year but Saudi Arabia raised the selling price of their oil to the US which would further encourage the draining of US supply leaving us in a very dangerous situation. Now Russia is planning to reduce diesel exports by 25% as their maintenance season gets into full swing and they also have a dual purpose in sticking it to the US. The confluence of these events with US oil rig counts falling and Saudi Arabia and Russia conspiring to drive down US oil and product inventories is the reason why we have been warned to be hedged.
Even as the market seemed oblivious to the coming dangers of tight supply because of worries about a recession and the possibility of bank failures, the reality is that the trajectory of future US oil production would beak and the supply side would start to drain and that is happening. The marketers’ fixation on demand destruction that did not happen is now switching to consternation about the ability of the market to meet demand. You should be going over plans to get prepared.
Natural gas may bottom as power demand issues in Texas and a smaller-than-expected increase in natural gas inventories, though it came in at our number, is giving the market new life. The EIA put working gas in storage was 3,148 Bcf as of Friday, September 1, 2023, according to EIA estimates. This represents a net increase of 33 Bcf from the previous week. Stocks were 462 Bcf higher than last year at this time and 222 Bcf above the five-year average of 2,926 Bcf. At 3,148 Bcf, the total working gas is within the five-year historical range.