About The Author

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

Oil prices were trying to shake off China economic fears then a Fitch analyst appeared to Fitch things up. Oil prices made it back to even on the day after trying to shake off the shock that China cut a key interest rate but plunged on a Fitch, maybe or maybe not, US bank credit rating downgrade.

CNBC reported that, “A Fitch Ratings analyst warned that the U.S. banking industry has inched closer to another source of turbulence — the risk of sweeping rating downgrades on dozens of U.S. banks that could even include the likes of JPMorgan Chase the ratings agency cut its assessment of the industry’s health in June, a move that analyst Chris Wolfe said went largely unnoticed because it didn’t trigger downgrades on banks. But another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe told CNBC in an exclusive interview at the firm’s New York headquarters. “If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions,” Wolfe said according to CNBC.

As oil traders know, U.S. banking turmoil is usually a big negative for oil prices and the market did respond negatively. Yet the funny thing is a Moddys analyst said maybe there will be a downgrade and then again, there may not be. So, sell the maybe and buy the actual downgrade, assuming there is one.

I guess you can have it both ways when it comes to China. On one hand the oil market is weak because as the Wall Street Journal reported China unexpectedly cut the interest rate on a key facility that funnels one-year loans to banks to 2.5% from 2.65% previously. At the same time, they’re shoveling the equivalent of $55.2 billion of new loans into the banking system. That is raising concerns about China’s faltering economy even as China’s oil consumption remains very strong. Reuters reported that, “China’s July oil refinery run was the third highest ever, according to Reuters, only marginally below the all-time record of 14.90 million bpd in March. China’s oil refinery throughput in July rose 17.4% from a year earlier, data showed on Tuesday, as refiners kept output elevated to meet demand for domestic summer travel and to cash in on high regional profit margins by exporting fuel.

There are also concerns about Russia which according to Reuters hiked its key interest rate by 350 basis points to 12% on Tuesday, an emergency move to try and halt the ruble’s recent slide after a public call from the Kremlin for tighter monetary policy. But does it really matter if we have a shortage of oil?

Russia at the same time raised its oil export duty to $21.04 a ton from September 1st. It doesn’t sound like Russia’s too concerned about selling their oil. Besides Russia has already found a way around the price cap. They charge less for the oil and more for the shipping.

Bloomberg reports that spot premiums rising for barrels from Middle East to North Sea and that has been driven by record crude demand. Bloomberg points out that in the North Sea, a vital window has seen a spate of bidding, while Asian buyers have also bought millions of barrels of US crude. Bloomberg writes, “The move comes as refining margins — the profit processors make from buying crude and making fuels — have increased in recent weeks. The International Energy Agency said on Friday that global oil consumption surged to a record in June and should rise further on average later in the year.”

One must acknowledge that technically if the market doesn’t bounce back from this sell-off, it will look toppy technically. Perhaps it will be the American Petroleum Institute report that will and get the focus back on the supply tightness as a report should show substantial drawdowns in both crude oil gasoline and diesel. I am expecting a 3 million barrel drop in crude oil supplies this week. I also expect to see a drop of 3 million barrels in gasoline and distillate supplies as well.

According to AAA retail gasoline prices are continuing to rise. AAA put the regular gasoline national average at 386.2 sense a gallon that means we’re only about $0.09 from exceeding year ago levels. In the Chicago area we’re seeing a big price spike. S&P global reports Chicago RBOB gasoline has risen to the highest outright price in more than eight months, possibly on lower pipeline flows from the US Gulf coast. Chicago’s West Shore/Badger RBOB traded on Friday at a 30¢/USG premium to the September RBOB Nymex futures contract, buoying prices by 6.02¢/USG to $3.26/USG, the highest since 2 November.

This comes as the Strategic Petroleum Reserve repurchased 600,000 barrels of oil back for the reserve last week, but they still have a long way to go! Now some in the Biden administration will try to take credit for buying these barrels back cheaper than they sold them because they sold the barrels and an average price of $96.25. So buying them back at the current prices they may be tempted to take a victory lap. The problem is is that they have all a lot of barrels to buy back and they’ve been unsuccessful so far with their plan to refill the reserve at the rate that they expected to be able to do it. That doesn’t even include the fact of the damage the SPR releases did to the free markets as well as the damage it did to the relationship between OPEC, which right now is making us pay by cutting production in response to what the Biden administration previously did. We should also point out a course that President Trump wanted to buy back oil for the reserve when it was at $24.00 a barrel. Obviously, with the foresight that it sometime in the future that oil might be needed. That was thwarted by the democrats led by Chuck Schumer who said it was a bailout for the oil companies.

Yesterday the Energy Information Administration pointed out that U.S. oil production in the Bakken oil field hit its highest revenue level since November of 2020 but on the flip side of that in Eagle Ford production fell to its lowest level since December of 2022. The Energy Information Administration also pointed out that oil production in the Permian basin fell to its lowest level since February of 2023 and well output from all the top shell producing regions fell to its lowest level since May of 2023. Obviously this continues to raise concerns about the EIA’s projection for U.S. oil production going forward. My guess is that they are going to be forced to lower that expectation as U.S. oil production will falter.

Natural gas is giving up its gains falling in sympathy with the oil market this morning. Still hot temperatures in Texas along with the lack of wind power should cause a smaller than expected injection next week.

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Phil Flynn

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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