There was a lot of news over the weekend that oil traders eagerly awaited, and the general gist is that demand will get better, and supplies will get tighter, states Phil Flynn of PRICE Futures Group.

OPEC Plus did not have a surprise in store and rolled over their previously agreed production cut as expected. Demand expectations are rising as China starts to ease up on Covid restrictions and winter is ahead of us. The Wall Street Journal reported that the Hang Seng and CSI 300 indexes rose, and the yuan rallied against the dollar on easing Chinese Covid restrictions.

The EU price cap of $60 a barrel was called weak by Ukrainian President Volodymyr Zelenskyy and considering that $60 a barrel was above the current Russian oil price, I can’t say that I blame him. This morning Russia responded that “the oil price cap will destabilize the global energy market but will not affect Russia’s ability to sustain its military operation in Ukraine.”

China jumped on this opportunity as they say they plan to strengthen their ties with Russia regarding energy. India is also sucking down Russian crude.

Reuters reported that “the G7 price cap will allow non-EU countries to continue importing seaborne Russian crude oil, but it will prohibit the shipping, insurance, and re-insurance companies from handling cargoes of Russian crude around the globe unless it is sold for less than the price cap”. Russia will continue to sell its oil through back channels and openly to China and India but what will happen is we’ll see are reduction of supply to Europe where it is most needed. OPEC is warning that this move is going to tighten global spare production capacity. They’re warning that the movement by nations to try to control prices by releasing oil from their strategic petroleum reserve will backfire. Reuters reported that “The cost of shipping the Urals from Russia’s ports to China and India, the key grade’s consumers in Asia, doubled in December to $18 million and $15 million lump sum (full price for the tanker voyage).

We are already seeing signs of supplies tightening here in the United States. Once again, this week it’s expected that we’ll see another substantial drawdown in crude oil even though we will see another release from the US strategic petroleum reserve. Crude should fall by around four million barrels and product supplies should fall by two million barrels, respectively.

The problem that we have here in the United States is that US oil production is lagging because of uncertainty created about regulations in environmental, social, and governance (ESG) that are sucking investment and the entrepreneurial desire to invest in US oil and gas. In fact, the only hope for new supply is coming from Venezuela and its dirty oil. As I said on Fox News on Saturday morning Cavuto Live with David Asman, I believe that the movement by the Biden administration to reengage Venezuela and get their oil is a sign of desperation. They know the risks of oil shortages are rising.

The Biden administration likes to take credit for the drop in gasoline prices but behind the scenes, they are getting nervous. They must realize that the odds of substantial price spikes this winter are very high in that the Strategic Petroleum Reserve will not be able to keep prices lower for that much longer. When you release oil from the reserve to interfere in the market, that discourages demand moderation. It also discouraged investment to bring on new supplies.

While Europe and China have built up inventories as we head into winter, there is an extreme risk of a global production deficit as we get into the deep darkness of winter.

While hearing talk of a severe recession, the problem is that at least for right now oil demand has not plummeted. We have seen some impact of the Federal Reserve raising interest rates and the weakness in the dollar, artificially low prices kept demand stronger than it should have been. Now as the Fed says they could slow the pace of interest rate increases, the dollar is backing off those highs giving oil some support. The Wall Street Journal reported today that, “Brisk wage growth could lead officials to consider raising their policy rate above 5% in 2023 to fight inflation even as they prepare to downshift the size of rate increases at their December meeting.”

If you look at oil and gasoline demand globally, according to Jodi it increased in September and is above pre-Covid levels. Bloomberg News is reporting that “House Republicans announced a probe into reports of a failed “secret deal to boost oil production” between Biden administration officials and Saudi Arabia, as the party prepares to take majority control of the chamber next year. In a letter Sunday, Republicans on the House Committee on Oversight and Reform said they’re investigating allegations in a New York Times article in October that officials at the State Department and National Security Council sought a clandestine deal with Saudi Arabia to increase OPEC+ production before the US midterm elections in November. Instead, in August, OPEC+ announced it was slashing production, in a blow to President Joe Biden.” Well, if you can’t get a deal with Saudi Arabia maybe try Venezuela.

Natural gas got crushed on the Sunday night opening but is mounting an attempt at a comeback. Ben Smith at ENERCAST reports that 1.1 bcfd capacity on Permian Highway is scheduled offline for maintenance Tues-Fri this week. EBW Analytics reports that “The January contract reached as high as $7.42 intraday Tuesday before technical momentum fizzled and reversed lower. After failing to hold the 20-day moving average, January plunged on Friday and technically remains poised for a further steep loss.

Technically the oil and product markets are bottoming. The curve is looking more like the market is pricing a much tighter market. A much tighter market than was being priced in the last few weeks during the annual oil turkey drop.

Learn more about Phil Flynn by visiting Price Futures Group.