Is it about supply or is it about demand? The battle continues between oil prices and the Federal Reserve and other central banks, states Phil Flynn of PRICE Futures Group.

Signs that US oil inventories are going to go into a period of severe decline in the coming weeks are being offset by the promise of higher interest rates from global central bankers. 

On the supply side, things are tightening significantly. According to the Energy Information Administration (EIA), US oil inventories plummeted by 9.6 million barrels from the previous week and are at 453.7 million barrels. That puts US crude oil inventories are approximately 1% below the five-year average for this time of year. Yet that number came as US Strategic Petroleum Reserves (SPR) fell to the lowest level since August of 1983 and are a chilling 149.3 million barrels below year-ago levels. The report caused oil prices to bounce back after pressure from central bankers talking up the chances of more aggressive interest rate increases by the end of the year.

Fed Chairman Jerome Powell said that two interest rate increases are more than likely on the table. This comes as European Central Bank Christine Lagarde and Bank of England Governor Bailey all spoke about the need to continue to fight inflation almost at any cost even if that cost is a recession. These comments are raising concern about global demand that some say is already faltering even as the supply side continues to tighten.

Even the IMF is entering the fray predicting oil demand by trying to downplay Chinese economic stimulus actions as reports show that Chinese oil demand had its first dip since May. 

Bloomberg News reported that “China will likely disappoint those hoping the government will roll out massive stimulus to shore up the weakening economic recovery, said Zhu Min, a former deputy managing director of the International Monetary Fund. There are a lot of expectations for the Chinese government to have more stimulus policies. I don’t think this is real,” Zhu said during a panel Thursday at the World Economic Forum’s Annual Meeting of the New Champions in Tianjin, China.” While Mr. Min does not think it is real, history shows that China rarely bluffs when they signal economic stimulus. Yet like the central banks, they must talk down oil. If they do not, then they can’t control inflation.

Yet oil tried to ignore those warnings and a rally in the dollar, and then try to decide whether it should price in a recession and start to be concerned about tightening supply. In the US, supplies are going to continue to tighten significantly. Not only is oil going to lose the SPR and oil from Saudi Arabia, but we are also getting reports of turmoil in Libya's politics and the potential of a loss of supply.

My buddy Anas Alhajji, the former OPEC Advisor, says that “If we do not end up in recession in 2023, US commercial inventories will decline by about 50 mb toward 400 million barrels.” Reports say, “Authorities based in eastern Libya on Saturday threatened to blockade oil exports over the Tripoli government’s use of energy revenue, accusing it of wasting billions of dollars without providing real services.” The word is that this is not getting resolved and is raising the risk of a cut-off of Libya’s oil exports. Saudi Arabia is going to cut exports to the US and there is talk that the temporary 1.0 million barrel-a-day production cut could become permanent.

Yet there are still demand worries. Dan Molinski at the Wall Street Journal says that “shrinking US/Europe industrial demand is key to this year’s oil market slump (and why OPEC cut output twice in recent months). Ethane, propane, naphtha, massive overhangs of inventory” and while that is the true overall supply of distillate and gas are well below average, and demand overall for products seems to be robust. China’s apparent oil demand showed its first month-on-month decline of the year in May, signaling that the post-Covid-19 rebound in its consumption of transportation fuels may have peaked.

If demand globally is so bad, why are US oil exports soaring? US exports hit the second-highest week on record at 5,338 million barrels a day. In the US, demand is solid, and supplies are tight. US gasoline stocks remain down -6.8% vs the seasonal five-year average, and US distillate stocks remain down -14.4% vs the five-year seasonal average.

Total oil demand averaged 20.2 million barrels a day, up by 1.3% from the same period last year. Over the past four weeks, motor gasoline product demand averaged 9.3 million barrels a day, up by 3.8% from the same period last year. Distillate fuel product supplied averaged 3.7 million barrels a day over the past four weeks, down by 0.1% from the same period last year. Jet fuel product supplied was up 9.6% compared with the same four-week period last year. Air travel in the world is just below all-time highs and rising. If this is a recession, what would a boom look like?

The EIA though believes that the gasoline supply is ok. They say, “US gasoline inventories have been increasing since May 26, 2023, when they hit a low for 2023 (216.1 million barrels). Inventories on May 26 were also lower than the bottom of the previous five-year (2018–2022) range for this time of year and 18.3 million barrels (8%) lower than the previous five-year average. East Coast (PADD 1) gasoline inventories account for most of the national inventory growth despite refinery unit outages that are limiting regional gasoline production. Relatively high gasoline prices on the East Coast and falling freight rates are driving US imports from Europe, which is driving the inventory increases. If gasoline demand remains near the bottom of recent norms for this time of year and if gasoline prices on the East Coast remain high, gasoline supplies on the East Coast should remain within the five-year range.” Let’s hope they are right.

How is the energy transition going? Dan Graeber pointed out that the path to decarbonizing the world remains a long one. “Fossil fuel's share of global primary energy demand fell slightly from 82.3% to 81.8%, while renewables’ share rose from 6.7% to 7.5%.  

Javier Blass at Bloomberg pointed out, “According to the annual Climate Change Committee, UK’s independent adviser on tackling climate change report that “sharply rising electricity prices in the UK have reduced the per-mile savings of EV cars vs gasoline and diesel cars (and if using public rapid chargers, gasoline, and diesel is today cheaper). I thought Transportation Secretary Pete Buttigieg and the Energy Secretary said that electric cars would be cheaper. Better look across the pond.

Well, at least Warren Buffet was not fooled and still is betting on fossil fuels. Reuters reported that Berkshire Hathaway Inc. (BRK.A) said on Wednesday it has acquired more shares of Occidental Petroleum Corp (OXY), boosting its stake in the oil company to above 25%. The conglomerate, controlled by billionaire Warren Buffett, said in a regulatory filing that it paid about $122.1 million for 2.14 million Occidental shares between June 26 and June 28. Berkshire had also purchased about 4.66 million Occidental shares on May 30.

Low prices are fighting one of its toughest foes, the global central banks. The risk of them losing control of this oil market soon remains high. Be careful.

Learn more about Phil Flynn by visiting Price Futures Group.