The Phil Flynn Energy Report
Summer Solstice Sendoff
Crude oil prices started the first official day of summer with an impressive breakout to the upside as the market starts to realize the unlikelihood of a return of unsanctioned Iranian oil back to the world market.
The reopening trade has people getting ready to travel; that’s causing the demand for gasoline, diesel, and jet fuel to skyrocket. Today, oil prices are pulling back a bit as we await weekly inventory data from the American Petroleum Institute, which should show another big drop in U.S. crude oil supply that could exceed 5.0 million barrels this week. The trend of falling crude supplies could accelerate in the coming weeks, as demand is growing faster than production. There are also reports that Russia is getting antsy to raise oil production.
Reuters reports the following:
OPEC+ is discussing a further easing of oil output cuts from August as oil prices rise on-demand recovery, but no decision had been taken yet on the exact volume to bring back to the market, two OPEC+ sources said on Tuesday.
The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, is returning 2.1 million barrels per day (bpd) to the market from May through July as part of a plan to gradually unwind last year's record oil output curbs. OPEC+ meets next on July 1.
"It is highly possible to increase gradually from August," said one of the sources, adding that no final decision had been made and the exact volumes are yet to be agreed on.
The talks mean that OPEC and Russia are likely to find common ground again on oil production policy. Moscow has been insisting on raising output further to avoid price spikes, while key OPEC producers, such as Saudi Arabia, have given no signals on the next step until now.
OPEC+ does need to raise production. The market is screaming for more oil supply and it needs it now. In fact, the group discussing only a modest increase is probably more bullish than it is bearish because OPEC+ isn’t going to add as much oil as the market wants or needs.
Oil also benefited from a risk-on attitude as the stock market bounced back big on the reopening trade and as Fed officials continued to suggest that they would stay accommodative despite worries about inflation.
The Wall Street Journal reported that "Federal Reserve Chairman Jerome Powell said Monday that job growth should pick up in coming months and temporary inflation pressures should ease as the economy continues to recover from the effects of the pandemic. ‘The economy has shown sustained improvement,’ Mr. Powell said in testimony prepared for delivery Tuesday on Capitol Hill, noting progress on vaccinations and vast stimulus efforts by Congress and the Fed.”
The Wall Street Journal also reported that "Federal Reserve Bank of New York leader John Williams said he isn’t ready for the U.S. central bank to dial back the support it is giving the economy amid uncertainty about the recovery from the pandemic. ‘It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good,’ Mr. Williams said in a virtual appearance Monday. ‘But the data and conditions have not progressed enough for the [Federal Open Market Committee] to shift its monetary policy stance of strong support for the economic recovery,’ he said.”
Now oil prices don’t have to face the possibility of the Fed raising rates in 2 years and can focus on the fact that we're seeing the economy reopen at a dramatic clip and the oil demand is going up while investment is going down.
The Biden administration, in their infrastructure talks, is proudly saying that they’ll refuse to allow a gasoline tax that would help them pay for their structure plans. It's kind of funny when you want to transition away from fossil fuels and make policies that raise the cost of oil and gasoline, but then say that you're trying to help the average American by keeping their gasoline prices low.
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