Oil prices and gasoline diesel prices soar to new highs because the market is finding out that reports of weak global oil demand were just an illusion, states Phil Flynn of PRICE Futures Group.

Kind of like the “illusion” that Hunter Biden used when he got President and then Vice-President Joe Biden on the phone with his corrupt business partners as he was selling the “illusion of access” to his father, affectionately known as the “Big Guy”. The Energy Information Administration (EIA) also gave us the Illusion that oil demand in the US was weaker than it was. They had to report a ponderous upward revision in the oil demand reports that makes one wonder why they had missed it so badly.

The EIA reported that US oil demand in May was at an all-time high as it raised its demand numbers by 973,000 barrels a day to a record 20.776 million barrels a day.  We may break the all-time US oil demand high that according to Bloomberg was in August 2005 at 21.666 Million barrels a day. Coal demand also reached an all-time high in 2022, rising above 8.3-billion tons and grew by about 1.5% in the first half of this year to a total of about 4.67-billion tons according to the International Energy Agency. That illusion of weak demand not being a reality may start to answer the question as to why petroleum inventories are so tight even as demand was supposedly so weak.

The Energy Report also questioned the weekly demand estimates because they did not fit the information we had on the ground. Both Valero and Exxon Mobil said that they had thought the EIA was underestimating demand and they had oil demand at a record. This morning Bloomberg reports that BP CEO Bernard Looney says that global oil demand has been “incredibly resilient”; he sees a 2m b/d y-on-y increase in 2023. This underreporting of oil demand in May by the EIA may have weighed on prices much to the detriment of meeting record demand.

In a market that has already been distorted by Strategic Petroleum Reserve releases, the underreporting of demand probably further discourages investment in a market that desperately needs it. Now the market is facing a price spike that sadly is not an illusion and could bring inflation talk back to the forefront of the conversation. Inflation fears are giving the dollar new life as fuel prices start to soar AAA reports that regular gas hit a new high for the year today at $3.78 a gallon for regular unleaded. Mid-grade also is surging to $4.18 a gallon and premium at $4.515 a gallon. The diesel crack spread is also hitting the highest level since October of 2022 as global supply tightness is causing a major run-up in price. This will cause pain to consumers that believed the so-called “inflation reduction act” would reduce inflation.

Yet as John Kemp at Reuters points out, “US oil and gas drilling activity has continued to slow in response to the slump in prices in the middle of 2022. The number of active rigs fell to an average of 672 in July 2023 down from an average of 780 in December 2022 (-14%). Slower drilling activity is likely to ensure oil production peaks in the third quarter of 2023 and starts to fall, while gas production is likely to peak in the fourth quarter before falling.

The illusion of weak demand also seemed to be enhanced by the illusion created by the release from global oil reserves that gave the market the illusion that the market was well supplied. But that illusion was only a paper moon, sailing over a cardboard sea because it reduced global backup inventories by a record amount. By sliding Strategic Petroleum Reserve oil inventories into commercial reserves, it gave the illusion that supplies were higher than they were instead of being just below average. The supplies of oil were massively below average yet because of that illusion that supplies were ample, it discouraged investment.

The Energy Information Administration said that crude oil production in May fell to the lowest level since February of 2023 coming in at 12.662 million barrels a day. We also see that OPEC's July crude output fell by 840,000 barrels a day to 27.34 million barrels a day and that’s due to the Saudi Arabian lollipop cut. OPEC output fell by 460,000 barrels a day in May according to Reuters.

Now comes reality and that reality may start to show up today in weekly inventories where we should start to see massive drawdowns start to hit the market. I expect that we’ll see a drop in crude oil inventories of at least three million barrels. Product inventory should fall by three million barrels as well. Some are projecting a much larger drawdown this week. Still, I don’t want to get too far ahead of ourselves because we know the draws are coming whether it starts this week or the week after. 

We believe we still have significant upside price risk. Shorts are going to start exiting positions. Inventories will start to drown out the worries about rising interest rates and a potential recession. When the illusion of weak demand and ample supply is lifted, we will all be forced to face reality, unless you’re Joe Biden of course. Because it’s only make-believe if you believe.

Dan Molinski at the Wall Street Journal wrote that “Natural gas prices erase earlier gains and fall 0.2% to end the day at $2.634/mmBtu in a somewhat listless, rangebound trading market. “The weekend weather data trended 3-5 CDDs hotter, while also forecasting a rather hot US pattern for August 11-16, which potentially aided early gains,” says NatGasWeather.com in a note. “Reasons for selling were the usual, highlighted by strong US production and plump surpluses of +345 billion cubic feet.” A monthly EIA report showed natural gas production, measured by gross withdrawals, hit another all-time high in May at 124.6 billion cubic feet per day, up 25% from five years ago. For July, natural gas futures fall 5.9%.”

Learn more about Phil Flynn by visiting Price Futures Group.