Demand Exceeding Supply. The Energy Report 07/09/2025

It’s the oldest story in the book. Prices go up when demand exceeds supply, not only in oil and products but in wholesale power driving up electricity costs.

The Energy Information Administration (EIA)  in their Short-Term Energy Outlook confirmed that we have a global supply deficit. Not only did they have to raise their price forecasts for Brent crude by $3 a barrel more than a month ago, they have also lowered its production forecast for the United States. The EIA warns that falling oil prices have slowed U.S. drilling and completion this year. U.S. crude oil production is projected to drop from a peak of just over 13.4 million barrels per day in Q2 2025 to below 13.3 million b/d by Q4 2026, with an average of 13.4 million b/d expected for both 2025 and 2026.

This comes as the Dallas Federal Reserve survey shows U.S. oil industry leaders do not anticipate a near-term recovery. Drilling declined in Q2 due to rising costs, while oil prices remain around $60-$70 per barrel, too low for many producers to profit. Nearly half of energy executives now expect to drill fewer wells in 2025 than they did earlier this year. And while the EIA blames the price forecast increase miss on the fact that in last month’s STEO, which was released just before the conflict over Iran’s nuclear program escalated in mid-June, the reality is that they have consistently overestimated U.S. oil production and underestimated demand. They maintained that despite the risk premium, growing global oil inventories will likely keep Brent prices under downward pressure, averaging $58/b in 2026. This forecast was made before OPEC+ raised its August production targets on July 5, which are higher than what was previously assumed.

The EIA also reported that on July 2, the U.S. Commerce Department lifted export license requirements that previously restricted ethane exports to China. As a result, we updated our June STEO forecast, now projecting U.S. ethane exports will exceed 500,000 b/d in 2025 and reach nearly 650,000 b/d in 2026 due to anticipated growth in trade with Chinese petrochemical crackers.

Our take on this report is that the government continues to have a negative outlook on the economy. Probably that it’s not based in the actual numbers that we are seeing. The expectations that President Trump’s aggressive trade policies would push the globe into a recession has not happened. The other key thing to point out is that it hasn’t significantly contributed to inflation which we contend that it never would. Inflation is caused by the government spending too much money. I think with President Trump’s Big Beautiful Bill we will see lower inflation going forward even though the trade war will cause some prices to spike but others will drop. We also expect to see economic growth here in the United states with the Big Beautiful still exploding with tax cuts lighting the fire under the economy thereby causing a surge in oil and gas demand that the market may not be prepared for.

In fact, the market right now is facing a squeeze play on global distillate inventories. The short-sighted green energy policies that shut down refineries have caused a shortage that could have an impact on the economy. Global diesel inventories are at the lowest level since 1996 along with the refinery closures. Unplanned outages in several European refiners including British petroleum reported disruptions that tighten the supplies of diesel even further. The diesel crack spread hit the highest level since the US attack on Iran’s nuclear facilities yesterday but double topped and pulled back after the weekly American Petroleum Institute report caused a pause in the market momentum.

The API slowed momentum after a much larger than expected build of 7.1 million barrels in crude oil supplies. That sharp increase caused the spread to readjust and even though distillates did fall by 800,000 barrels. The increase in the supply of crude is playing with the spread just a little bit. The markets could see a 2.2 million barrel draw in gasoline inventories which is to be expected around the 4th of July holiday weekend but there are some people that are a bit disappointed that we didn’t see a draw of over 3,000,000 barrels this week.

The Energy Information Administration report comes out today with their weekly status report and if they confirm today’s numbers it will make it more interesting for the diesel crack spread. But it should also give us an opportunity to get into it because we do not believe that this supply squeeze is over yet. As we look at the expiration of the July gas oil in Europe tomorrow, that’s going to provide us some kind of an idea of just how high the diesel crack might go.

Natural gas prices remain low as hot weather eases demand. The EIA expects higher natural gas storage in the coming months, raising its forecast to 3,910 billion cubic feet by October-5% more than last month’s estimate. Consequently, the Henry Hub spot price is projected to average $3.40/MMBtu in Q3 2025, down 16% from June’s forecast. Prices are still expected to rise next year, with averages of $3.70/MMBtu for this year and $4.40/MMBtu for next year, due mainly to a slight production drop in 2026 as LNG exports increase. Yet where we are going to see a big increase in prices is when it comes to wholesale power prices. They expect U.S. average wholesale power prices to increase by whopping 12% this summer compared with last summer.

Although natural gas prices are lower than expected in June, they remain above last summer’s levels, contributing to higher wholesale power prices. Additional heat waves could cause further spikes in these prices. That spike in wholesale prices is a warning sign for the economy and the reason why the Trump Administration has made it a national priority to improve our power grid to get prepared for the record-breaking demand that we’re going to see in this country. The future of the US economy is going to depend on data centers and artificial intelligence and we need to get our grid prepared. Reuters is reporting that electricity bills are protected the surge by more than 20% this summer in some parts of Pennsylvania

The weather is also going to be key for power and natural gas. Fox Weather is reporting that communities across the U.S. are reeling after torrential rain produced catastrophic flooding that sent deadly walls of water rushing downstream, devastating communities in Texas, New Mexico and North Carolina – all within a week. Fox Weather reports that homes in New Mexico have been destroyed and search and rescue operations are underway after catastrophic and historic flooding left at least three people, including two children, dead in the village of Ruidoso. Officials said the victims, an adult male, a 4-year-old girl and a 7-year-old boy, were swept downstream by the unprecedented flooding that occurred in a burn scar area from recent wildfires. Fox Weather reports that the death toll continues to rise in the wake of historic and catastrophic flooding that decimated communities across Texas’ Hill Country as at least 160 people remain missing. Prayers for all.

Make sure you download the Fox Weather app to keep up with the latest on weather and at the same time you should stay tuned to the Fox Business Network.

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