Oil prices had a rough go on reports that the White House, desperate to fill a growing diesel supply gap by lifting sanctions on Venezuela, states Phil Flynn of PRICE Futures Group.

The hope is a lifting of sanctions on Venezuela will be better able to export that now coveted heavy blend of dirty oil that is so good at yielding diesel that globally is undersupplied.

You can see those concerns in the October diesel crack spread that soared to a high of $52.59 yesterday, a new all-time high. In return for the sanctions relief, the US is looking for Venezuela to run a fair election. You know, like requiring mail-in votes that can be harvested and not requiring any ID to vote, stuff like that assures a fair vote total.

Of course, I don’t know how we can question the outcome of an election because I believe that may be a felony. I mean that’s why we saw Hillary Clinton, and Nancy Pelosi, Stacy Abrams, Jimmy Carter, Debbie Wasserman Schultz get indicted. Wait, I forgot. You can only indict Republicans for questioning an election. So, because Maduro is not a Republican, it might work.

Something better work when it comes to diesel supply as we head into winter. The crack spread is a cry for help, and we saw the supply of diesel in the weekly EIA status report improve modestly by 900,000 million barrels last week but still 16% below the five-year average for this time of year. And there is some doubt that even if sanctions are lifted Venezuela can raise production fast enough to make a big difference.

We also saw a huge crude draw of 6.1 million barrels from the previous week. At 433.5 million barrels it puts US crude oil inventories about 2% below the five-year average for this time of year. Yet the real story is that we saw a near record-breaking crude draw of 3.1 million barrels, the largest weekly draw since October of 2021 falling to 30.7. We should see those supplies continue to plummet in the coming weeks.

Jack Hutchison pointed out that when Cushing, OK levels dropped to 20 meals last June, WTI was posting $120. History may not repeat, but it will most likely rhyme. Refiners without SPR oil now will drain the CME Group delivery point and that should provide strong underside support for West Texas Intermediate as refiners need to rock to keep up with demand.

The EIA reported that US crude oil refinery inputs averaged 16.8 million barrels per day which was 30 thousand barrels per day more than the previous week’s average. Refineries operated at an impressive 94.5% of their operable capacity last week. Gasoline production increased by 9.7 million barrels per day. Distillate fuel production increased last week, averaging 5.1 million barrels per day. We saw an uptick in weekly diesel and gasoline demand, as we expected, and if you look at the total demand on the four-week moving average, it is very impressive.

The EIA's total product demand at 20.9 million barrels a day, up by 4.5% from the same period last year. That number reflects global demand for oil and products are running near all-time highs. Gasoline demand averaged 9.0 million barrels a day, up by 1.3% from the same period last year. Distillate fuel product supplied averaged 3.8 million barrels a day over the past four weeks, down by 2.2% from the same period last year. Next week’s crude number should draw but because of all the storms, we may see lower exports next week.

When we look at global demand, there’s been a lot of concern about China and that seems to be weighing on the market. The BRICS conference shows that in some ways it’s a new block that could challenge the US for energy security. Yet when we look at Chinese demand the numbers on the ground still do not fit the slowing economy mantra. It was reported that onshore Chinese crude inventories dropped significantly at the end of July, falling nearly 30 million barrels over the two weeks. This drop coincided with a pop in floating storage and a corresponding drop in crude imports at the end of July into August.

Energy was a big part of the Republican debate on Fox News Channel last night. The clearest answer was from Vivek Ramaswamy, a former technology entrepreneur who suggested climate change was a hoax in response to a host question. He was clear on his energy policy when he said, “This isn’t that complicated guys, unlock American energy, drill, frack, burn coal, embrace nuclear.”

Still, despite all the underlying bullish fundamentals, the market is easing off on concerns about the global economy slowing down and concerns that we may get some aggressive talk out of leaders at the Jackson Hole conference today. Technically oil pretty much needs to hold near yesterday’s low or if we close below that area, it opens the door technically for a larger washout maybe as low as the 70s. On the other hand, if we mount support and have a sharply high close on the day, it will signal a run toward new highs fairly quickly. We still hold a long-term bullish bias, but we acknowledge technically things are looking a little shaky right now. We do believe if we do get a bigger washout, it could be a great buying opportunity for the rest of the year. It is a great time to pull out your fancy options strategies.

The EIA is playing with the numbers and adjusting how they count US oil production and raising their oil price forecast at the same time. The EIA wrote that in their August Short-Term Energy Outlook (STEO), we increased our forecast for US crude oil production in the Lower 48 states (L48) in 2023 and 2024 because of higher well productivity and higher forecast crude oil prices than we had previously expected.

In the August STEO, they forecast that crude oil production in the L48 in the second half of 2023 will average 10.6 million barrels per day (b/d), up 360,000 b/d from the July STEO. We increased our forecast L48 crude oil production for 2024 by 240,000 b/d from the July STEO to 10.8 million b/d. The US crude oil production forecast increased even though rig counts have recently fallen.

According to Baker Hughes, 520 oil-directed rigs were active in the United States during the week of August 18, 2023, an 81-rig decrease compared with the same week last year. However, increased productivity has offset the decline in active rigs so far in 2023. In 2024, they expect the number of active rigs to increase, helping to grow crude oil production in the second half of the year.

Crude oil production in the Permian Basin is driving our forecast of L48 crude oil production growth. They forecast that production in the Permian Basin will increase by 430,000 b/d between January and December this year. This growth is more than our forecast total L48 production growth (410,000 b/d) during that period, because production declines in other regions, offset some of the forecast within the Permian Basin.

In the August STEO, we forecast that the price of Brent crude oil will average $87 per barrel (b) from August to December 2023, up from our July forecast of $79/b during that period. Crude oil prices increased primarily because of extended voluntary cuts to crude oil production in Saudi Arabia and our expectation of increased global demand. We expect the production cuts, combined with increasing demand, will cause global oil inventories to fall and put upward pressure on oil prices through the end of this year. We agree with that last statement.

Natural gas prices are pulling back on hopes that cooler temperatures will ease natural gas demand. The problem is that the wind was not blowing last week during the heat. That could lead to a smaller than expected injection into supplying. We think natural gas prices are close to a bottom, but we want to be hedged with options because it could be volatile based on weather.

Learn more about Phil Flynn by visiting Price Futures Group.