Over the last 24 hours, the news flow has favored the bulls in the energy complex. The biggest risks to the oil market, such as the Delta variant of the coronavirus, saw the news that would ease extreme doom and gloom concerns of massive oil demand destruction.
Not only did we see reports of falling COVID cases in England, which was a hotspot of the Delta variant, but we are also seeing reports of rising vaccinations rates in US COVID hotspots. It appears that the message from the government to go get vaccinated is getting some unvaccinated people to move. In England, the daily number of new infections recorded fell for seven days in a row to 23,511 cases, half what it was one week ago.
We also heard from Jerome Powell of the Federal Reserve that he didn't believe that the corona variant would be a major risk to the economy. The Fed also juiced up the market by suggesting that there are no plans to raise interest rates anytime in the foreseeable future and even the debate about rolling back purchases of mortgage-backed securities and bonds hasn't been decided on.
The Fed also acknowledged that there are upside risks to inflation and obviously if there is an upside risk to inflation that means there are upside risks to the price of oil and natural gas.
China also stepped in to try to calm the markets after concerns of a crackdown assuring companies in China that they could IPO in the United States. China is learning quite quickly if they pull back from capitalistic principles their economy is going to pay for it.
Then you have Saudi Arabia overnight raising prices for oil which is also a sign of very strong demand. Saudis lifted its Arab Light crude pricing to Asia by 50c a barrel month over month for Sept. to the highest since February 2020. The Saudis are not that worried about COVID demand destruction.
We have the Energy Information Administration (EIA) data that was very bullish across the board showing big draws in distillate inventories, crude oil and gasoline they show that US energy production fell, gasoline demand and diesel demand went up, and it showed another draw in Cushing, Oklahoma which is raising concerns that the important benchmark could soon run out of oil. Supplies in Cushing OK fell 1.3 million barrels 2A low of 35.4 at that storage point.
The EIA Status report as far as supply came out pretty much as we envisioned it. The EIA said that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.1 million barrels from the previous week. At 435.6 million barrels, U.S. crude oil inventories are about 7% below the five-year average for this time of year.
Total motor gasoline inventories decreased by 2.3 million barrels last week and are about 0% below the five-year average for this time of year. Finished gasoline and blending components inventories, both distillate fuel inventories decreased by 3.1 million barrels last week and are about 7% below the five-year average for this time of year. Propane/propylene inventories increased by 1.9 million barrels last week and are about 14% below the five-year average for this time of year.
EIA also showed that U.S. oil production fell to 11.2 million barrels a day. The drop in production is also very supportive of prices. It showed an uptick in both gasoline and diesel demand at very solid levels. Gasoline demand got back up to 9.325 million barrels a day. Distillate demand surged to 4.356 million barrels a day. Reports show that miles traveled by US vehicles for the week ended July 25: Total VMT est 17.15 b vehicle miles, +1% vs same week 2019. Passenger VMT is -1% vs 2019. Truck VMT +8% vs 2019.
The other downside risk for oil is some possible return of Iranian oil, which right now doesn't look very likely. Not only is France showing their displeasure with Iran, overnight US Secretary of State Antony Blinken said the negotiating process with Iran cannot go on indefinitely. He said that the US demonstrated good faith and desire to return to compliance with the nuclear deal, the ball remains in Iran's court.
Natural gas is trying to come back. After a correction on weather forecast it showed that the heatmap gave us a break, but longer-term forecasts are calling for August to be extremely hot and extremely dry. If those weather forecasts turn out to be correct, we may see another surge back up for natural gas.
Global demand is strong and if we get some extreme weather, it should resume the bull market. Right now it's a difficult play as we could break to the downside if this weather doesn't come through, but ultimately, a big break would be a great opportunity to block and hedge.