Gasoline prices hit the $4.00 a gallon mark in Boise, Idaho, for the first time this year and that can’t be a good sign for the rest of the country. RBOB futures surged Wednesday rising 7.69 cents a gallon yesterday hitting the highest price since April as the Energy Information Administration (EIA) reported that US refinery activity hit 95.8% the highest since August 16th of 2019.
The surge in refining activity throws cold water over the weakening oil demand mantra. Yet it was not only US refining demand that raised expectations of rapidly tightened oil supply in the coming weeks, but also signs that global oil demand refuses to crater and talk that Saudi Arabia won’t stop until it makes $80.00 a barrel a floor and not a ceiling. The EIA reported that US crude imports from Saudi Arabia dropped to the lowest level since 2021 which is signs that we’re going to see very good compliance on OPEC production cuts.
Data from the Petroleum Planning and Analysis Cell (PPAC) in India, the world's third-largest oil consumer, said that India’s fuel demand in May rose 9.7% year-on-year, while diesel sales continued to climb to hit an all-time high. India’s consumption of fuel, a proxy for oil demand, totaled 20.03 million tonnes in May, up from 18.54 million tonnes in April. Sales of diesel, mainly used by trucks and commercially run passenger vehicles, increased around 5.1% in May to 8.22 million tonnes from a month earlier, the highest ever, as per PPAC data going back until 1998.
Gasoil, or diesel, accounts for about two-fifths of refined fuel consumption in India and is directly linked to industrial activity, according to Reuters. That comes after China’s oil demand hit a record 16 million barrels per day in April. Yesterday MarketWatch reported that China’s crude oil imports recovered to 51.44 million tons, or around 12.16 million barrels a day, up 17% month-on-month and 12% year-over-year, in May. So when are we going to see all of that weak demand that everyone has been talking about?
So that makes the tight US oil supply situation for oil more bullish. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.5 million barrels from the previous week. At 459.2 million barrels, U.S. crude oil inventories are 2% below the five-year average for this time of year. That draw came even though we had a 1.9 million barrels release from the Strategic Petroleum Reserve and the fact that the EIA has been underreporting US oil production.
The good news is that US crude production hit a three-year high of 12.4 million barrels a day. Oil production was the highest since 2020 even though we’ve seen rig counts drop and that’s showing signs of more efficiency by US oil producers, the best most innovative on all the earth. The bad news is that despite their efforts, that increase in production is not going to be felt because of an acknowledgment that the EIA did not capture those efficiencies and recent data and that increase doesn’t add new barrels but captures barrels that have already been produced.
The EIA clarified this by saying, “When we release the Short-Term Energy Outlook (STEO) each month, the weekly estimates of domestic crude oil production are reviewed to identify any differences between recent trends in survey-based domestic production reported in the Petroleum Supply Monthly (PSM) and other current data. If we find a large difference between the two series, we may re-benchmark the weekly production estimate on weeks when we release STEO. This week’s domestic crude oil production estimate incorporates a re-benchmarking that increased estimated volumes by 110,000 barrels per day, which is about 0.9% of this week’s estimated production total.”
The EIA showed increases in distillate and gasoline stocks, but supply is well below the five and ten-year seasonal average. The EIA reported that, “Total motor gasoline inventories increased by 2.7 million barrels from last week and are about 8% below the five-year average for this time of year. The EIA said distillate fuel inventories increased by 5.1 million barrels last week and are about 16% below the five-year average for this time of year. Refineries are pumping out gasoline as Central Atlantic Coast region gasoline stocks are the lowest in history (which includes New York Harbor)according to Byrne Kelly,
While the market may not appreciate the potential impact from the Saudi lollipop 1.0 million barrel a day cut, Russia sure does. Reuters is reporting that, “Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman praised, during a telephone discussion on Wednesday, their cooperation within the context of the OPEC+ oil producers’ group, the Kremlin said on Wednesday.
“The topic of ensuring stability on world energy markets was discussed in detail,” a Kremlin statement on the Telegram messaging app said.
“Both sides praised cooperation within the framework of Opec+ allowing for the adoption of timely and effective steps to ensure balance between supply and demand for oil.” The statement noted the importance of agreements reached at the group’s meeting this week under which Saudi Arabia will make a deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024.” Of course, why wouldn’t the Russian President praise him as he will get the benefit of higher oil prices without even lifting a vodka glass.
Some people were a bit disappointed that the oil market didn’t act better after the announced Saudi cut. Perhaps the more muted reaction could be more dangerous as far as an upside move. Sometimes when the oil market gets a sugar high and we see a big spike, demand shock sets in and there’s a pullback in prices. Now as supplies continue to tighten and prices creep higher, it could mean an even bigger move than it had. The price of oil spiked up 5 or $10 after the announcement. US crude oil calls continue to look cheap at this point especially with the possibility of a supply deficit later in the year. This might be a good time to start putting them on.
With all the talk of renewables it’s still fossil fuels that keep the lights on and the economy rocking. The EIA, according to their Short-Term Energy Outlook (STEO) pointed out that U.S. electricity generation from natural gas reached a record-high 619 billion kilowatt hours (BkWh) during the most recent winter heating season (November 1–March 31), averaging more than 120 BkWh per month and accounting for 38% of the country’s electricity generation mix. Electricity generation from natural gas increased in the United States this past winter due to increased demand for electricity and continued reductions in electricity generation from coal. U.S. electricity generation from natural gas peaks in the summer when demand for electricity is greatest—largely driven by demand for air conditioning.
A smaller peak occurs during the winter, when homes and businesses in some areas of the country use heat pumps, electric radiators, space heaters, and other electric-heating equipment to heat buildings. Overall, U.S. electricity generation this past winter was the highest since we began collecting this data in 1997. The increased electricity demand was met by natural gas, wind, and solar—all of which increased their overall electricity generation compared with the previous winter of 2021–22. In contrast, electricity generation from coal decreased compared with the previous winter.
Green energy folks should be reminded that natural gas is much cleaner than coal and kills less birds than the ugly wind turbines that end up in a dump in a couple of years. Natural gas traders are being reminded of a seasonal bottom coming in natural gas by EBW analytics as well. It might be time to start legging in some calls on the natural gas as well.