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Phil Flynn

Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665

Global oil producers can rest easy as the predictions of so-called “peak demand” may have been shattered. Ok, for this week anyway. The Energy Information Administration not only reported that supplies of crude oil, gasoline, and distillates are all below the five-year average, we also have record-breaking demand. The Energy Information Administration reported that implied gasoline demand for the “late great internal combustion engine” surged above 10 million barrels a day for the first time in history. That is an incredible number and while it is most likely will not be maintained after the Fourth Of July holiday, it shows that the post covid oil and gas demand recovery is demolishing all the doom and gloom predictions about oil demand made last year.

This should also be a wake-up call for policymakers who want to rush towards the possibility of climate change policies that may leave global oil markets undersupplied and potentially do harm to the global economy. The Triple A national average stands at $3.143 and if that price keeps rising, it will start hurting lower-income Americans.

It wasn’t only gasoline that was breaking records. The Energy Information Administration also reported that crude oil inventories were drained at a record pace. Crude supply fell for a seventh week in a row, dropping by 6.9 million barrels to 445.5 million barrels, which is the lowest level since February 2020 and 7% below the five-year average. That means crude supply has fallen almost 39 million barrels in the last 7 weeks. WOW! It also puts the supplies back to where we were pre-covid. The draw would have been even larger if it were not for another 1.69 million barrel release from the Strategic Petroleum Reserve.

The EIA reported that distillate fuel inventories increased by 1.6 million barrels last week but at the same time it is still 6% below the average for this time of year. Propane watchers should take a look at those inventories as well as they are 18% below the five-year average. If you look at total commercial petroleum inventories, they fell by 9.9 million barrels last week! That is a huge drop!

It was not just gasoline where the implied demand numbers were incredibly strong. Demand numbers were strong across the board. Total product demand averaged 20.9 million barrels a day. That was up 17.8% from last year. Even distillate demand averaged about 4.1 million barrels a day and that was up 17.9% from last year. Jet fuel, of course, is coming back in a big way and while it’s not back to pre-covid levels, it’s getting closer and supply-demand was up 81.9% compared with the one year ago levels.

Now you would think with this cornucopia of bullishness, oil prices would have just skyrocketed yesterday but there are still some concerns that are dampening the bullish enthusiasm. The big elephant in the room is still the OPEC Plus cartel disagreement. The market this morning is rallying cautiously in the hopes that the dispute between Saudi Arabia and the UAE will not lead to an all-out production war.

Still, the disagreement is raising concerns about the viability of the OPEC plus cartel and the way the members of the cartel view the concern about peak demand. The UAE thinks that their production years may be dwindling and they want to take advantage of their increased production prowess. Saudi Arabia has taken the brunt of production cuts so they don’t necessarily think that it is fair that the UAE raises output more than was originally agreed upon.

Russia wants to raise production not only because they need the revenue but because they are worried about losing market share. We all know that Russia has a lower break-even point than Saudi Arabia and other members of the cartel.

For the shale producers, the rise in prices has been a blessing and a curse. It’s been a blessing because those that have not locked in hedges during the depths of the sell-off are making record profits. It has been a curse for other companies with locked in hedges near $50.00 a barrel and are losing money at these prices. The other problem for shale is the regulatory environment from the Biden administration that is still restricting shale production. Those restrictions of course are leading to lower production. We did see production did jump up in yesterday’s report to 11.3 million barrels a day but we’re still a far cry from where we were pre-covid days.

So think of this. U.S. gasoline demand is at an all-time high and back to pre-covid levels but shale producers are being restricted to not raising production to levels that we saw before the shale showdown.

Another supportive thing for oil is the dwindling prospects that the U.S. can once again get in the nuclear deal with Iran. The Biden administration is feeling the window is closing to get an Iranian nuclear deal done and the seventh round of the Vienna talks for the JCPOA still isn’t set. Iran says that they need more time but the question I ask is, more time for what? More time to raise nuclear production?

Two days ago, Reuters reported that, “Iran has begun the process of producing enriched uranium metal, the U.N. atomic watchdog said on Tuesday, a move that could help it develop a nuclear weapon, and that three European powers said threatened talks to revive the 2015 Iran nuclear deal. Iran’s steps, which were disclosed by the International Atomic Energy Agency and which Tehran said aimed to develop fuel for a research reactor, also drew criticism from the United States, which called them an “unfortunate step backward.”

The election of Ebrahim Raisi as president of Iran and a known hardliner, is playing the international community and taking them for a ride. The hardline president has no interest in rejoining the deal. President Trump’s maximum pressure strategy was a much better way to deal with Iran than trying to negotiate with a country that is more interested in regional domination than they are at being a part of the global economic community.

For natural gas, last week it was a larger than expected injection into supply that thwarted the market’s rally. This week it was exactly the opposite. The Energy Information Administration reported that working gas in storage was 2,574 Bcf as of Friday, July 2, 2021, according to EIA estimates. This represents a net increase of 16 Bcf from the previous week. Stocks were 551 Bcf less than last year at this time and 190 Bcf below the five-year average of 2,764 Bcf. At 2,574 Bcf, the total working gas is within the five-year historical range.

The natural gas report was pretty bullish considering a lot of companies normally shut down for the 4th of July holiday. Despite the recent correction, we still think that there are significant risks to the upside for natural gas especially later in the summer.

Phil Flynn

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