Sharply rising oil prices and product prices suggest that we have lost control of the global petroleum markets and that will have a detrimental impact on the global economy, states Phil Flynn of PRICE Futures Group.

The Biden administration last week seemed to welcome a larger-than-expected increase from the OPEC plus cartel, but even Biden wondered whether it would have any real impact. Perhaps he should have asked that question before he decided to drain out our Strategic Petroleum Reserve. He also seems to be backing off his planned visit to Saudi Arabia.

The Saudis, for their part, wasted no time in shaking up the market by raising their official selling price on oil over the weekend, sending crude surging to its highest level since the Russia Ukraine war broke out. Saudi Arabia raised the July official selling price (OSP) for its flagship Arab Light crude to Asia by $2.10 from June to a $6.50 premium, the highest since May, when prices hit all-time highs. The move by the Saudis is seen as evidence of a very tight market. Last month the Saudis lowered their price because of weaker demand due to China’s covid shutdown.

Now China's demand is coming back as factories are reopening and more talk of an even wider reopening. It was reported by Bloomberg that shutdowns in Beijing and Shanghai are speeding up and schools are getting ready to reopen as well as restaurants. Still, public transportation is being held back but because of a big drop in Covid cases, a full reopening is on track to happen.

India is still looking to Russia to keep its oil prices down. India is not happy with OPEC and is taking advantage of this situation and is in talks to increase Russian oil imports from Rosneft right now.

Bloomberg reports that Saudi crude will be particularly popular among Asian refiners in nations such as Japan and South Korea that have shunned Russian oil following the invasion of Ukraine. India and China are still willing buyers, however, and some Chinese processors will even take Iranian and Venezuelan flows. Refiners will submit requests for July volumes from Saudi Arabia by Monday.

The spikes in US oil and gas prices are taking their toll on people and businesses, and if we don’t get some price stability, pretty soon we will see a negative impact on US economic growth. It’s hard enough for the economy to adjust to rising diesel and gasoline prices when they raise a couple of cents at a time, but when they start to leap by a nickel and a dime, that has a detrimental impact. Once again, AAA reports another record-breaking high for regular unleaded gasoline and diesel overnight. AAA put the price of regular unleaded gas at us an astonishing $4.865s per gallon they put diesel at a record-breaking $5.645 per gallon. That price increase for regular gasoline is up from 4.619 dollars a gallon a week ago and diesel one week ago was at 3.966 a gallon.

Based on what we’re seeing in the futures prices, these price increases aren’t going to end anytime soon. Retail prices for RBOB gasoline futures set records on the futures market on Friday and again on Sunday night. This does not bode well if you’re looking for some relief at the pump. It’s becoming increasingly clear that cushions in refining capacity have had a major devastating effect on the ability of the oil industry to meet demand. This, of course, is part and parcel of the green energy movement Biden threatened to replace oil and gas with over time. He accused the energy industry of polluting significantly. That type of attitude has discouraged the investment needed in the US refining sector and it’s one of the reasons why we’re closing refineries at a time when the refining margins are at an all-time high. This is what happens when the government gets involved in the market. It’s not just the United States that has this shortsighted energy policy.

As we have pointed out many times before, the war between Russia and Ukraine in part has been driven by energy. Russia knew that they had a monopoly over Europe when it came to oil and gas supplies, and we’ve already seen how they’ve used that to their advantage in this war in Ukraine even as they committed an unspeakable atrocity, they continued to get paid for their efforts by Europe.

I think yesterday’s market action was a little bit ahead of itself, but we cannot dismiss the fact that these prices are going to continue to go up until we see a significant demand response. As Europe moves towards a Russian oil ban, it is unclear how Europe is going to replace those supplies. At the same time, the United States has already drawn down its strategic reserves. There is not a lot of oil left in the bullpen if we have an actual disruption of supply. On top of that, the United States is going to have to replace that supply. 

We continue to warn people that they need to be hedged in this type of situation. Over the last couple of years, we’ve been watching this slow-motion train wreck when it comes to oil and gas supplies. We cringed when people said that the cancelation of the Keystone XL pipeline would not impact gasoline prices or that the drilling moratorium and burdensome regulation would not hurt the US economy. Or the prediction that demand had peaked. Now global demand is already back to pre-pandemic levels and will break to new all-time highs if we expect to see the economy grow. There is no way that alternative energy can replace oil and gas on a massive scale and until we face up to that reality, we’re going to see a world that’s going to be dictated by sharply higher oil and gas prices.

This, of course, is going to impact food and the price people pay to eat. It’s going to create potential food shortages and potential starvation, especially in poor countries. The world is going to be watching Ukraine very carefully to see the production and export of grain. In a must-read in the Wall Street Journal, they are saying that “before Russia’s invasion, around 98% of Ukraine’s prodigious grain exports would flow from ports on the Black Sea. But those ports have been shut by a Russian naval blockade, and warehouses, rail yards, and other key export infrastructure have been targeted and damaged by Russian attacks. Despite the war, Ukraine’s farms are expected to produce around 30 million tons of wheat, corn, and other food commodities this year. Traders and farmers, with the support of the Ukrainian government and neighboring nations, are seeking alternative routes to export those grains to stave off global food shortages and relieve soaring prices. The endeavor, however, is far from straightforward. The new routes are longer, often backlogged, and more expensive. The challenge is complicated by stretched infrastructure and continued Russian attacks on bridges and railways.

We have also been warning about a natural gas price spike and those prices continue to soar as the US looks to help Europe replace the supply that is being withheld by Russia. EBW Analytics says that the July natural gas contract warded off deep, repeated tests of support last week including a bearish EIA storage surprise—to narrow losses to 20.4¢ week-over-week. Further retests of support may be likely near term as natural gas looks to establish a firmer bottom. Yet over the weekend, however, hotter weather forecasts added nine CDDs over the next three storage weeks while production dipped 0.6-0.8 Bcf/d on pipeline maintenance—setting the stage for early-week price gains that could escalate until production rebounds higher.

Learn more about Phil Flynn by visiting Price Futures Group.