The first half of the oil story shows disappointed oil bulls with concerns about rising interest rates, Federal Reserve officials promising a slowdown in the economy, bank failures, perceived weakness in Chinese oil demand and the inability to rein in sanctioned oil from Russia and Iran. Yet the second half of the story may look radically different because the fragile supply surplus that the global oil market has enjoyed may turn into a deep deficit in the second half of the year.
China demand has been a concern even as they imported record amounts of oil and ran their refineries at record high levels. Those concerns are mainly coming from the industrial sector and oil dipped on more news surrounding those concerns. Reuters reported that, “China’s manufacturers reported business activity declined again in June as the post-epidemic recovery ran out of momentum. The official purchasing managers’ index rose marginally to 49.0 (3rd percentile for all months since 2011) in June from 48.8 (2nd percentile) in May. The index has been below the 50-point threshold dividing expanding activity from a contraction for three consecutive months.”
Yet is that bullish or bearish. The weak data is almost going to ensure an economic stimulus response from China that should rebound China demand that has its first covid reopening dip in May. The Fed has been a major hurdle as the historic rate hiking cycle has lowered oil demand expectations and has kept a lid on prices. Yet as we know, the Fed did break some banks and despite tough talk by Fed Chairman Powell about the possibility of 2 more rate hikes this year, some are not so sure. Atlantic fed president Rafael Bostic who is not a voter said the Fed needs to pause to get a better sense of the impact from previous rate hikes especially because inflation is starting to cool. Even Powell said:
“We see the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy, particularly housing and investment. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
The Fed chairman also saying that he is understanding that the rate hiking cycle puts some pressure on the banks but he said that the banking sector is resilient. In other words, he feels he can continue to raise rates at a historic pace without breaking any other banks.
Russian oil exports have cooled after reaching the highest level we’ve seen since before sanctions. It appears that Russia is getting more pricing power on their oil as well as the price of EUR has come down in countries like India and China. In the meantime, the question has to be asked why have the sanctions on Russian oil failed so miserably. There are big reports that there is missing money perhaps pay to some type of a middle man or middle country that has feasted on making sure that Russian oil continues to move. So while the West talks tough about trying to sanction Russian oil, in truth the black market from Russia was allowed to happen because Europe feared a world without any Russian oil on the market. At the same time this gives Russia more power because they realize that they still hold the ability to shock the market not only with oil by cutting off supply but by cutting off the ability for Ukraine and Russia to export grain.
Sanctions on Iran oil have failed as has Biden’s Iran policy. CNN is reporting that Rob Malley, the US special envoy on Iran, has been placed on leave without pay, which occurred after his security clearance was suspended earlier this year amid an investigation into his handling of classified material, multiple sources told CNN. A US official said that Malley’s clearance was suspended amid a State Department diplomatic security investigation into the possible mishandling of classified information. Another source familiar with the matter said he was placed on unpaid leave on Thursday afternoon.
“I have been informed that my security clearance is under review. I have not been provided any further information, but I expect the investigation to be resolved favorably and soon. In the meantime, I am on leave,” Malley told CNN.” So much for talk of lifting sanctions on Iran.
US demand continues to go gangbusters. Demand is expected to explode over the holiday travel season with record demand for airline flights and record travel miles. Gasoline prices have remained relatively steady but that could change in the second half of the year. We are we going to see an end to the Strategic Petroleum Reserve releases and the Saudi Arabian 1,000,000 barrel a day production cut could be made permanent if market sources are correct.
The Saudis still want to make good on making oil speculators “Ouch” and at the same time they have no love lost for the Biden administration and would love nothing more than for them to feel a little bit of pain after they feel that they have been shunned by this administration and that they have allowed the market to be manipulated with unjustified Strategic Petroleum Reserve releases and failure to buy back oil as they had originally promised. According to the latest OPEC survey, June oil production fell by 50,000 barrels a day for May to only 28.18 million barrels per day.
Is this the drought buster farmers have been praying for as they have suffered through the worst drought since 1988. Many farmers prayers were answered with rain across big parts of the grain belt ahead of today’s major grain report, but others face challenges by a terrible damaging storm. Fox Weather reported, “A life-threatening derecho unfolded across the Midwest Thursday, with severe thunderstorms producing wind gusts upwards of 100 mph.
Millions of Americans were impacted by the line severe thunderstorms that produced large hail, damaging wind gusts and even possible tornadoes across a 500-mile stretch of the country. Destructive winds were reported in more than half a dozen states from Nebraska through Kentucky, and the Storm Prediction Center received more than 500 reports of severe weather. A spotter reported a gust of 90 mph in Adrian, Illinois, just after 11 a.m. CDT from their home weather station, with an estimated gust of 100 mph, according to a National Weather Service storm report. Nearby, another spotter in Adrian reported a full-size barn was destroyed, and full-size trees were blown to the east.”
Speaking and tweeting with different farmers across the country, some were very disappointed that they did not get more rain. Others felt that the rains were more than adequate but sadly the storm also did a lot of damage to barns, to grain silos and even flattened the corn crop. While the rains are welcome, and more rain is expected, because of the severe drought and some of the worst crop conditions for corn and soybeans, we will still need more rain. We cannot afford to slip back into a hot and dry condition. Some are forecasting heat, others forecasting cooling. The future forecast and today’s USDA report is going to be critical for the market direction. It is also going to be critical for ethanol and biofuel prices that could be dramatically impacted by the drought of 2023.
Reuters says that June markets have one final test with the U.S. Department of Agriculture’s acres and stocks reports on Friday. This set of reports is associated with the largest average CBOT corn and soy moves of the 15 major USDA report days per year.
Looking forward, Janice Dean of Fox News Channel and Fox Weather is forecasting “strong to severe storms will be possible from the Plains to the Ohio Valley. Smoke from Canadian wildfires will spread across the eastern seaboard while the heat expands over the Mississippi Valley. Record-breaking highs are also expected for California.” This weekend the weather and the forecast going forward and its impact on grain prices will be one of the most critical in 34 years. Make sure you download the Fox Weather ap to keep on top of it.
Natural gas came in right on my projection! Working gas in storage was 2,805 Bcf as of Friday, June 23, 2023, according to EIA estimates. This represents a net increase of 76 Bcf from the previous week. Stocks were 566 Bcf higher than last year at this time and 358 Bcf above the five-year average of 2,447 Bcf. At 2,805 Bcf, total working gas is within the five-year historical range.