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
US oil production, according to the Energy Information Administration (EIA), hit a three year high of 12.7 million barrels a day. More or less. depending on how the EIA does the math. Which has changed in recent weeks. But does that matter if we see crude oil supplies in the US plummet and if reports from the EIA saying that Legacy oil production declines rates from tight shale oil basins in the US reached record levels per DPR data? Probably not.
Permian Basin production declines are leading the way with the largest decrease through time due to increased activity. Other areas are failing but have at least stabilized decline rates.
And how is it possible for US oil production to keep rising in the US with rig counts that keep falling? While we know that the US oil and gas industry is among the best in the world when it comes to innovation and being able to produce more with less, at some point there is only so much it can do. If they do not keep drilling, especially with record oil well production decline rates, then production is going to fall. It does not help if you add a very uncertain regulatory environment that is holding back much needed investment.
What is more concerning is the reason is that the increase in oil production might not be actual barrels of new oil but due to what the EIA said last week was a ‘crude oil production re-benchmarking’.
That changes the way the EIA calculates its weekly production estimates. So that in part explains why we saw a so-called increase in oil production while US oil supplies fell by 5.4 million barrels last week as refinery runs surged by 167,000 barrels per day last week to 16.75 million bpd, their highest since January 2020, hitting 94.7% of total capacity. This is markedly higher than the long-term average of 89.64%. The other reason for the decline was US oil exports that surged by 2.2 million bpd, the largest weekly rise since August 2022. That caused a drop of 1.76 million bpd in net imports.
This refinery rate, the highest since 2020, makes one question the weekly demand estimate from EIA that showed weakly weakness in product demand. The EIA said that gasoline demand fell from 9.302 million barrels a day to 885,1 million barrels a day. They have diesel demand falling from 372 million barrels a day to 3648 million barrels a day. So, it is best to look at the four-week moving average for demand trends. According to the EIA the total demand for all petroleum products over the last four-week period averaged 20.9 million barrels a day. That is up by 3.8% from the same period last year.
Gasoline demand has averaged 9.0 million barrels a day over the last four weeks and for the first time is down by 0.9% from the same period last year. I expect an upward adjustment to gasoline demand next week. Distillate fuel demand supplies averaged 3.7 million barrels a day over the past four weeks, down by 2.1% from the same period last year. Jet fuel product supplies were up 4.6% compared with the same four-week period last year.
Supplies are tight and getting tighter. Not only did we see an 837,00 barrel supply drop at the Cushing, Oklahoma delivery hub, if you look at U.S. crude oil inventories, they about 1% below the five year average for this time of year. Total motor gasoline inventories decreased by 0.3 million barrels from last week and are about 6% below the five-year average for this time of year. Distillates fuel inventories increased by 0.3 million barrels last week and are about 16% below the five-year average for this time of year.
Yet oil took it as a negative mainly because of a weak stock market, a rising dollar and fears that the Fed is going to be more aggressive on raising interest rates as inflation fears are coming back. These renewed inflation fears come despite the Biden team celebrating the so called ‘Inflation Reduction Act’. The act that has failed to quell inflation. Maybe it’s because if you spend more money given from the government it creates inflation, but I digress.
Even as Biden claimed that, “helping families save thousands of dollars in energy bills” at the pumps and solar panels, the RNC pointed out that Americans are paying $2,250 more in increased energy costs since Biden took office. Yet the White House says that, “DOE estimates that the Inflation Reduction Act and Bipartisan Infrastructure Law will cut electricity rates by as much as 9 percent and lower gas prices by as much as 13 percent by 2030—putting tens of billions of dollars back in the pockets of Americans. Because of the historic investments driven by the Inflation Reduction Act that are building a clean energy economy and leading to greater access to clean power, Americans across the country are already seeing savings on their home energy costs.” Yet despite those claims and based on polls, the American people do not believe that claim as they know that is not the reality of the world, they are living in.
Add to that, September crude oil expiration is today and that seemed to lead to a lot of trade adjustment. Today the October contract takes the helm as the lead contract, and you should see a lot of position rolling today.
Biden’s policy of looking the other way as opposed to enforcing sanctions on Iranian oil has been a boom for Iran and China. TankerTrackers.com, Inc. reported that Iran has surpassed Saudi Arabia in oil exports to China. Bloomberg reported yesterday that China’s imports of Iranian oil are running at 1.5m b/d, the highest in at least a decade, Kpler data show. It’s not showing up in official data, but traders say they’re being classified as diluted bitumen mixture, other heavy oil and crude of other origin.
Reuters also is reporting that China’s refiners dipped into crude stockpiles in July for the first time in 33 months as imports dropped but processing rates remained high. So, if China’s economy is so bad, then why are their refinery runs so high? China has no intention of sacrificing economic growth in exchange for carbon reduction. They will only use the green energy transition to try to dominate their adversaries and the global economy.
Quantum Commodity Intelligence points out that Ethanol stocks in the US were higher for the second consecutive week in the first full week of August, as production picked up and gasoline deliveries fell, which more than offset an increase in exports, according to EIA data released Wednesday. US ethanol inventories were 2.4% higher in the week to 11 August at 23.435 million barrels, up from 22.880 million barrels in the previous week, according to weekly EIA data. This followed a marginal rise in the previous week. Stock levels are around 0.8% higher on the year and above the five-year average of 22.52 million barrels at this time of year. Ethanol production rose 4.5% on the week to 1.069 million barrels, which is a three-week high. Production levels were 4.6% higher compared with the same period last year.
The increase in production was down to higher output in the Midwest which rose to 1.012 million bpd in the week to 11 August from 965,000 bpd in the previous week. US gasoline deliveries also dropped on the week, helping to build ethanol stocks. Deliveries fell 4.8% to 8.851 million bpd in the week to 11 August, from 9.302 million bpd in the previous week. Exports of ethanol from the US to other countries rose around 10,000 barrels per day (bpd) to 79,000 bpd from 69,000 bpd in the previous week.
Dan Molinski at the Wall Street Journal writes, “U.S. government natural-gas data due Thursday is expected to show inventories increased last week by a smaller-than-normal amount as lingering heat in Texas kept cooling demand strong. The Energy Information Administration is expected to report that gas in storage rose by 34 billion cubic feet during the week ended Aug. 11, according to the average forecast of 14 analysts, brokers and traders surveyed by The Wall Street Journal. Estimates range from increases of 29 bcf to 39 bcf. The average forecast compares with a 21-bcf injection for the same week last year, and a five-year average rise of 41 bcf. The EIA is scheduled to release its natural-gas storage data for the week at 10:30 a.m. ET Thursday. A 34-bcf increase would mean gas stockpiles totaled 3.064 trillion cubic feet, 21.8% above last year’s total at this time, and 10.8% above the five-year average for this time of year.
Natural-gas inventories in 2022 were in a price-supportive deficit compared to historical averages due to strong gas-fired heating and cooling demand, and storm-related production disruptions. However, domestic natural-gas production surged to all-time highs at the start of 2023 and has remained high, while demand struggled during the first half of the year because of a mild winter and a shrinking U.S. manufacturing sector. Some of those issues may be starting to change, however, as summer heat has extended longer than normal in parts of the South, the Southwest and the West. That has caused consumption rates to increase in recent weeks.
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