President Donald Trump is fed up with crude oil prices and tweeted that “oil prices are too high, OPEC is at it again. Not good!” The Fed raised interest rates and Fed Chair Jerome Powell weighed in on oil and its impact on inflation and what they may mean for the economy going forward. This comes as surging U.S. refinery demand for oil shadowed over a 100,000-barrel a day increase in U.S. oil production. Gasoline demand and distillate demand reflect the Fed’s upgraded expectations of U.S. economic growth making the upcoming OPEC meeting very interesting as some OPEC members are against raising output. Not Good!
When Trump tweeted that those pesky OPEC boys were at it again, oil prices fell a bit, before bouncing back after a Bullish Energy Information Administration (EIA) petroleum status report. Usually, when the President wants OPEC to raise production, it is usually done through back channels. A U.S. president directly confronting OPEC out in public, regarding oil production policy, is unheard of. In the past, OPEC would take exception with a U.S. President that would tell them what to do with their oil production. Not so much with Trump. In fact, OPEC almost expects it. Rising political pressure from the United States along with Russia’s desire to restore oil output will basically assure us that OPEC will announce a production increase at the June 22, meeting.
Yet, the devil, as always, will be in the details. Iran and Venezuela, as well as some other OPEC countries, are against an increase. If Russia and Saudi Arabia agree to bring on production more slowly to appease the hawkish members, then the market will be woefully undersupplied. If they do raise, it takes away most of the global spare capacity. Oh, what a tangled web OPEC has weaved. The market will look to any statements today from Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman as they are expected to discuss how to boost oil production while maintaining their Petro-alliance when they meet in Moscow.
It is not time to declare victory on Inflation according to Jerome Powell, Chair of the Board of Governors of the Federal Reserve System. The Fed Chair pointed to oil as a main factor in pushing its inflation rate above the 2% target rate but warned that its impact could be transitory. He said that at any given time inflation may be above or below 2%, but even though that is ‘encouraging’ it is not time to party. On oil, he said that the Trump tax cuts will encourage more production and even more demand.
Well as far as demand goes, he is right. The EIA reported that U.S. crude oil refinery inputs surged to average 17.5 million barrels per day, 136,000 barrels per day more than the last week. Refineries runs led to a whopping 95.7% of their operable capacity last week. That led to U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) falling by a more than expected 4.1 million barrels.
Gasoline production surged to 10.5 million barrels per day to meet blistering demand. Over the past four weeks, Gas demand has averaged about 9.6 million barrels per day, up by 0.3% from the same period last year. Total motor gasoline inventories fell by a more than expected 2.3 million barrels last week and are in the upper half of the average range.
Distillate fuel production decreased last week, averaging more than 5.1 million barrels per day. Distillate fuel inventories decreased by 2.1 million barrels last week and are in the lower half of the average range for this time of year.
The take away from the report is that oil demand is surging. The Fed upgraded the U.S. economic outlook and that is being seen in oil. The market is going to be very tight and vulnerable to upward oil price spikes. The Federal Reserve raised its outlook on U.S. economic growth as its median real GDP forecast rose to 2.8%, up from 2.7%, for this year. Economic activity has been rising at a "solid" rate, the Fed's statement said, marking an upgrade from "moderate" in the previous statement. So, oil demand should rise at a solid pace as opposed to a moderate pace as well.
Gold whipsawed but rallied as the Fed said that inflation could exceed 2.1%. The big news is that gold finally moved.