China cuts rates and energy soars. It’s a mad, mad world, and the scramble for everything petroleum is on.
Brent Crude hits new highs for the year. New contract highs on October RBOB gasoline and ultra-low sulfur diesel are sending a warning that the energy-inspired inflation that we saw in yesterday’s Consumer Price Index may be just the beginning. Worries that China’s economy would weigh on global oil demand, which is the International Energy Agency’s best hope that oil supply and demand will get in balance, just got a kick in the teeth from the fact that China cut its RRR by 0.25 ppt.
This comes as US consumers are feeling the pinch of rising energy prices. The CPI showed that in August the price of gasoline rose 10.6 percent which was a major factor in the 0.6 percent monthly increase in inflation. Now with OPEC’s projected 3 million barrels a day crude oil supply deficit, the global mad scramble for supply of everything petroleum is on. The ability of consuming nations to fight back and stand up to Russian and OPEC supply cuts, has been diminished by policies designed to transition off fossil fuels and to make them more expensive. The second part of that plan is working very well.
The suggestion that Biden could play the Strategic Petroleum Reserve Card again is being floated and the administration says if need be, they could do it. They bragged that the US has the biggest SPR in the world. Yet while ours has been draining China’s has been increasing. So by draining our reserve, we are reducing our energy security and China is adding to their SPR and increasing their energy security.
China is also strengthening its alliance with our adversaries, many of whom produce oil and are taking more control of global energy markets. Reuters is reporting that China’s ‘teapot’ refiners mop up swelling Iranian crude, defying U.S. curbs”. China has laughed off US oil sanctions.
In Fact Reuters reports that, “Iran’s crude exports of about 1.5 million barrels per day (bpd) stand at their highest in more than four years, with more than 80% shipped to China, data from consultancies FGE and Vortexa shows.”
China has also been investing in Venezuela to secure oil supply in the future from the Maduro regime.
Reuters reported that, “Despite U.S. sanctions, China has been a key regular buyer of Venezuelan oil. Since state major China National Petroleum Corp, a dominant investor and oil client of Caracas, stopped lifting Venezuelan oil in August 2019 following toughened U.S. sanctions, China has been receiving Venezuelan oil via traders who branded them as Malaysian.”
In the US, the market is taking little comfort from a bearish weekly supply report in part because it was skewed because of a drop in exports and the Labor Day Holiday. Despite strong supply builds across the board, the total petroleum demand was higher.
The EIA said that total product demand over the last four-week period averaged 21.0 million barrels a day, up by 6.6% from the same period last year. Gasoline demand was 8.9 million barrels a day, up by 4.0% from the same period last year. Distillate fuel product demand averaged 3.7 million barrels a day over the past four weeks, up by 5.4% from the same period last year. Jet fuel demand supplied was up 9.0% compared with the same four-week period last year.
While petroleum supply in the US is below average everywhere. The EIA reported that crude oil inventories increased by 4.0 million barrels from the previous week. At 420.6 million barrels, US crude oil inventories are about 2% below the five-year average for this time of year. That does not include the SPR.
Total motor gasoline inventories increased by 5.6 million barrels from last week and are about 2% below the five-year average for this time of year. last week. Distillate fuel inventories increased by 3.9 million barrels last week and are about 13% below the five-year average for this time of year. Total commercial petroleum inventories increased by 10.4 million barrels last week.
We also saw US crude imports hit a whopping 7.6 million barrels a day this past week. The highest level since July 2020. The crude import trend has been increasing for 2 months as US oil production looks like it is starting to stagnate.
Users of oil products need to get ready for volatility. With the global oil supply cushion low and the oil supply deficit high, it’s going to be a character builder. Gas prices at the pump will rise again as will diesel. If you have not hedged you should still do so.
Natural gas is also on the rise! The heat in the south should give us a smaller-than-expected injection.