Front-month WTI futures hit $114 a barrel before pulling back dramatically after the Energy Information Administration (EIA) reported a less than spectacular gasoline demand number even though US refining hit the highest level in 30 years, as a percentage of capacity, suggests Phil Flynn of PRICE Futures Group.
Yet the pullback in oil probably had more to do with the fact that the quarter is coming to an end and we’re going into a three-day holiday weekend as we celebrate our independence here in America.
I know I harp on these three-day holiday weekends, especially the fourth of July, but you only have to go back a year ago to remember the selloff that we had on July fifth when most of the traders were at home barbecuing their steaks and whatever else they decided to do to celebrate their God-given independence. The other issue of course before the oil market is whether or not OPEC can ease the fear in the marketplace that global spare oil production capacity is running out. Reuters says that a big policy change was unlikely this month.
At its last gathering in early June, OPEC+ decided to raise output each month by 648,000 barrels per day (bpd) in July and August, compared with a previous plan to add 432,000 bpd over three months. One of the things that the Energy Report has been harping on for years is that we were sleepwalking ourselves into an energy crisis.
When I started writing about the lack of investment, the closing of refineries, and the potential production deficit we dismissed, the oil markets had a false sense of security that somehow global demand was going to dry up and if it didn’t, shale oil producers would make up the difference. Yet, it’s a little hard for US shale producers to raise production dramatically because they’re being fought every step of the way by the federal government, and while yesterday’s production number of 12.1 million barrels of oil a day was pretty impressive, it’s a far cry of where we would have been if we had different leadership in the White House.
The only talking point that they can give to the American people is the so-called oil leases that the oil companies are sitting on and not using and that they have all the tools they need from the federal government to raise production. That’s a flat-out misdirection from the truth. If they believe that the US energy industry has all the tools they need, then why won’t president Biden even meet with the leaders of the US energy industry and ask them? If you ask them, they’ll tell you very clearly that they do not have everything they need.
President Biden’s stubbornness to change course on energy is only going to hurt himself. Americans are not buying that president Biden has nothing to do with the rising gasoline prices and heating bills, or inflation. President Biden says to lower gasoline prices so he engineered a huge release from the strategic petroleum reserve, and while that sounds nice on paper, if you look at the spare production capacity we’re left with...it's basically none. So, in other words, it’s kind of like taking out the fire hose before the fire starts, and by the time the fire gets going you have no water pressure left to put the fire out. That’s why the OPEC meeting is going to be big for oil. The question is what kind of message can OPEC send to the market that they can supply enough oil to keep prices from a devastating price spike in the future. You only have to read between the lines of what OPEC is saying. Former OPEC Secretary-General Barkindo has said that there is no way that OPEC can replace all of the Russian oil if it gets cut off.
So I guess that’s one of the reasons why the Biden administration is attempting to find a way to continue buying Russian oil. Vladimir Putin has a lot of money, and coming up with this ridiculous price cap scheme is pretty laughable to any economist or person that has studied history. Yeah, when you’re desperate and you think you have all the answers you’ll try anything to double down on your failed policies. President Biden, of course, keeps blaming the oil companies for gas gouging, yet he has never made a mistake when it comes to energy policy—at least in his mind. In his mind, he’s a legend when it comes to building the US economy and making people’s lives better. That’s why there’s a new poll that shows that 85% of all Americans say that the US is headed in the wrong direction.
We need to congratulate refiners for the amount of production that they came up with despite the fact they’ve been encouraged by the green energy movement to shut down refineries or retool them for biofuels. This comes as the Energy Information Administration told us something that we already knew: US refining capacity has fallen for the second year in a row. The EIA said operable atmospheric crude oil distillation capacity, our primary measure of refinery capacity in the United States, totaled 17.9 million barrels per calendar day as of January first, 2022, down 1% from the beginning of 2021. According to our annual Refinery Capacity Report, 2021 was the second consecutive year of decreasing refinery capacity. Although US refining capacity decreased in 2021, the number of operable refineries in the United States increased from 129 refineries to 130 refineries. Two new facilities came online in 2021, but a much larger refinery shut down. The new facilities are the Texas International Terminals facility in Galveston, Texas, where a 45,000 b/cd atmospheric distillation unit was built at a refined products terminal, and the Talley Asphalt Products facility in Kern, California, where a 1,700 b/cd distillation unit was reported as part of an asphalt plant.
The Phillips 66 refinery in Belle Chasse, Louisiana, (also called the Alliance refinery) stopped refining operations following substantial flooding related to Hurricane Ida in late 2021. This refinery had an operating capacity of 255,600 b/cd. That’s why we need to keep an eye on the weather in the Gulf of Mexico because let’s face it, we can’t afford to lose another refinery. Fox Weather Reports "A tropical disturbance in the northwestern Gulf of Mexico is being monitored for development, but even if the system doesn’t organize into a tropical depression, heavy rain is expected along portions of the Texas coast for the next few days." The National Hurricane Center has identified the disturbance as Invest 95L and says there is about a 40% chance of it developing into a tropical depression before moving inland over Texas later Thursday.
An invest is simply a naming convention used by the NHC to identify an area of weather that it is investigating for possible development into a tropical depression or tropical storm within the next five days. A Hurricane Hunter aircraft flew into the disturbance on Wednesday and determined the system had not organized into a tropical cyclone.
In addition to the expected heavy rainfall, seas and surf will likely be on the increase through the workweek, which could pose a risk to beachgoers. Lifeguards always advise swimmers to stay out of the ocean when there is an increased threat of rip currents.
ZeroHedge reports that the White House is modeling $200 a barrel. They say that while the Biden administration is hoping and praying that someone–anyone–will watch the comical January sixth kangaroo hearsay court taking place in Congress that is meant to somehow block Trump from running for president in 2024 while also making hundreds of millions of Americans forget that the current administration could very well be the worst in US history, it is quietly preparing for the worst.
Is there some good news for consumers as gasoline prices on the retail level have started to come down we saw signs of this right around the Juneteenth holiday and it’s a credit to the refiners for raising production? The EIA reported that oil refinery inputs averaged 16.7 million barrels per day during the week ending June 24, 2022, which was 403,000 barrels per day more than the previous week’s average. Refineries operated at 95.0% of their operable capacity last week, the best reading in 30 years. Gasoline production increased last week, averaging 9.5 million barrels per day exceeding demand. Distillate fuel production decreased last week, averaging 5.1 million barrels per day. US crude oil imports averaged 6.0 million barrels per day last week, decreased by 0.2 million.
US commercial crude oil inventories even after 6.7 million barrels from the Strategic Reserve fell by ed by 2.8 million barrels from the previous week. At 415.6 million barrels, US crude oil inventories are about 13% below the five-year average for this time of year.
Total motor gasoline inventories increased by 2.6 million barrels last week and are about 8% below the five-year average for this time of year. Distillate fuel inventories increased by 2.6 million barrels last week and are 20% below the five-year average for this time of year. Implied demand for gasoline throws a lifeline to oil market bears but I would caution that these numbers probably will bounce back in a big way. Implied demand for total products supplied over the last four-week period averaged 20.0 million barrels a day, down by 0.1% from the same period last year. Over the past four weeks, motor gasoline products supplied averaged 8.9 million barrels a day, down by 2.0% from the same period last year. Distillate fuel product supplied averaged 3.7 million barrels a day over the past four weeks, down by 7.4% from the same period last year. Jet fuel product supplied was up 17.1% compared with the same four-week period last year.
The other factor that Raiders are going to watch as USDA reports is that we have seen some corrections in the grains and a lot of volatility. Going forward, we know supplies are tight, the question is just how tight, and if we have a cut-off of supply from Russia that could create major big-time shortages. So, we have to keep the IA and we may get some back door support or resistance because of that report.
Natural gas has been a whipsaw market; it’s up, it’s down, and then it’s up again. We believe that long term, we’re getting close to good value for natural gas. If the option premiums are too high, perhaps use a combination of futures and options unless we get a major pullback in the economy. We think supplies of natural gas are going to be very tight going into winter. If it wasn’t for the Freeport LNG, shut-down prices will be substantially higher than they are and I think if there are any signs that they’re going to restart operations, that could be the bottom.
Learn more about Phil Flynn by visiting Price Futures Group.
