Commodity bears may get scorched as the heat is on in more ways than one, states Phil Flynn of PRICE Futures Group.
A heat wave and the possibility of a hot and dry end to July are causing a major price spike in the US grain markets as there are growing fears of a supply deficit of food stocks as grain inventories globally linger near the lowest level since the 1970s. Russia of course will not let this crisis go to waste. They are raising the stakes by not renewing the Black Sea grain accord and accepting the point by attacking the Ukrainian port.
They are also taking advantage of what will become the great global oil supply drain as they are cutting oil production along with Saudi Arabia and exports, leaving the physical markets for heavy oil undersupplied. Russia and OPEC’s dominance over the future of oil prices has been solidified. The foolish and shortsighted Strategic Petroleum Reserve releases left the Biden administration and Europe having to ignore sanctions or price caps on any rouge nation or risk being undersupplied. Politicians that have ignored the warning signs of this growing food and energy crisis are starting to sweat and it has nothing to do with the heat.
Biden and global leaders who have decided to fight fossil fuel and make energy decisions based on politics must forgo their principles to stop oil and food prices from exploding. While Biden and European leaders have touted sanctions and oil price caps as the tool to subdue your enemies, the truth is the enemies are doing just fine.
Bloomberg News reports that when it comes to enforcing these tough sanctions, it has become a game of Don’t Ask, Don’t Tell. Javier Blass at Bloomberg writes, “Imposing and managing economic sanctions is a game of smoke and mirrors. Nothing is what it seems, and policy often bends markets in perverse ways to achieve political aims. Nowhere is that truer than in the global oil bazaar of 2023.” US and European policymakers are trying to achieve seemingly contradictory goals: reduce the oil income of Russia, Venezuela, and Iran while preventing an oil price rally. In another great piece by Blass he says, “Hurting Russia has taken priority over afflicting Iran and Venezuela — two other oil-producing giants also under sanctions. It’s a strange variation of “the enemy of my enemy is my friend”—in this case, the West is acting as if “the friend of my enemy is my friend.” Odd! As a corollary, Washington concluded that achieving its objective of harming Russia over its 2022 invasion of Ukraine required it to accept helping Iran and Venezuela. As a result, Iranian oil production has surged to a five-year high, making it the second largest source of additional supply in 2023, behind only the US shale industry. You read that right: Tehran will be the second-largest source of new oil this year—while formally under sanction. Officially, Washington says it’s implementing its Iran policy; in reality, it’s turning a blind eye to rising shipments from Iran, mostly to China.”
Whole grains are leading the commodity to move up, but oil prices are still somewhat subdued until we get today’s Energy Information Administration (EIA) report. The oil bears seem to be pinning their hopes on a slowdown in China because of their weak gross domestic product data based on expectations. Yet at some point, the market has got to realize that despite this so-called weak data coming out of China, their oil demand has been out of this world. And what is a warning is that China’s top economic planner pledged on Tuesday it would roll out policies to “restore and expand” consumption in the world’s second-largest economy. If that’s the case, then the death of Chinese oil demand is greatly exaggerated. Talk about the slow demand in China is now becoming like the conspiracy theories surrounding wearing masks to protect yourself from covid.
So, if you just look at the big picture to summarize, we’re seeing major cuts in production from OPEC and Russia. We’re seeing US oil production being downgraded by the Energy Information Administration. There are big pullbacks in the Baker Hughes rig count. We continue to see major underinvestment in oil and gas. Global oil inventories are pretty much below the ten-year average everywhere you look. Just like the grain markets, the oil markets may be just one headline away from a major oil price spike. Be prepared!
The American Petroleum Institute (API) did have a jaw-dropping three million crude oil supply drop in the Nymex delivery point in Cushing, Oklahoma. Overall, the API reported that the oil market is waiting for US inventory data from the American Petroleum Institute (API), an industry group, on Tuesday and the EIA on Wednesday. Overall, the crude fell 800,000. A surge in gasoline demand led to a 2.8 million barrel drop in gasoline supply and a 100.000 barrel drop in distillate is supportive for prices. Reuters reports that the EIA confirms the supply drop in crude would be the fourth crude stock decline in five weeks and a decrease of 0.4 million barrels in the same week last year and a five-year (2018-2022) average increase of 1.9 million barrels.
Learn more about Phil Flynn by visiting Price Futures Group.