Oil Prices Are Pulling Back

August 2, 2021 08:30 AM
The U.S. seeks an appropriate response to an Iranian drone attack on an Israeli ship
Gasoline demand continues to rise
Russia increased oil production in July for the first time in three months
Energy Report

Energy Report

The Phil Flynn Energy Report 

Appropriate Response

Oil prices are pulling back a bit this Monday morning on questions about an appropriate response to the alleged drone attack on an Israeli ship by Iran and the appropriate response to the delta variant of the covid 19 virus.

The Wall Street Journal reported that ”the U.S. joined the U.K. and Israel Sunday in blaming Iran for a fatal drone strike last week on an Israeli-linked tanker near the coast of Oman in the Arabian Sea, and the U.S. said it would work with allies to develop a response to the incident.”

The statement from Secretary of State Antony Blinken marked unusually blunt language from the Biden administration, particularly as it is also seeking to revive a nuclear deal with Iran. “Upon review of the available information, we are confident that Iran conducted this attack,” Mr. Blinken said. “We are working with our partners to consider our next steps and consulting with governments inside the region and beyond on an appropriate response, which will be forthcoming.”

Virus Update

What’s a Monday without virus news. Here’s the latest. Bloomberg reports that the “virus is clouding the outlook for consumption across the Asia Pacific.” China faces a fresh outbreak, Thailand is set to expand its quasi-lockdown measures, and infections in Sydney matched a record. Data showed China’s economic activity eased in July, implying a more steady recovery as risks mount.

Yet, in the U.S., demand is soaring. Gasoline demand reportedly increased again and stayed near-record levels even as the national average for gasoline hit $3.176 a gallon. That pain is being felt in California, where the average price for regular unleaded is 4.379 a gallon.

Taxes, regulations, and logistics are a big part of California's woes, but they hit Illinois on the tax front. Zero Hedge reports, “As gas prices jump in Illinois, so do the gas taxes Illinoisans must pay. Illinois is one of just four states to impose a general state sales tax on gasoline, and that’s helped push Illinois’ gas taxes to the 2nd-highest in the nation, according to the American Petroleum Institute.” 

Illinoisans pay an additional 6.25% for every gallon of gas, on top of the standard excise taxes that were doubled in 2019. Hawaii, Indiana, and Michigan are the only other states that apply their general sales taxes to gasoline.

A Note On Production

Bloomberg reported that Russia increased oil production in July for the first time in three months after more generous quotas were extended to the entire OPEC+ alliance. Producers pumped 44.24 million tons of crude and condensate last month, according to preliminary data from the Energy Ministry’s CDU-TEK unit. That’s about 10.46 million barrels a day, or 0.3% higher than in June. In addition, the Bloomberg monthly OPEC oil output survey showed that several nations out of 13 in the cartel could not increase production in July, despite higher quotas and prices. However, overall OPEC output did increase thanks to higher Saudi output. 

The Russian and OPEC compliance numbers seem to suggest that the OPEC+ bond is closer than ever. Oh sure, it's easy to be chummy when oil prices are high and things are going your way. Still, the compliance numbers suggest that OPEC+ will be a force in the oil market for some time to come. The oil market is still uncertain about the impact of the delta variant of COVID-19. While there is some evidence of some weakness in the Chinese data, most of the data suggest strong demand and an oil market that will be undersupplied.

Natural gas is given some support on weather forecasts that showed the heat would return after a brief cool-off. However, despite a bullish injection, Andrew Weissman of EBW Analytics, September natural gas—now the front-month—posted a net loss last week. Market drivers included: (i) progress in returning to full service on Tetco; and (ii) very mild weather to start August, which moved prices at Henry Hub below $3.90 on Friday. 

Natural gas futures have held up better than expected, given the severity of the early August cool spell. However, with only a few days of very mild weather left and models predicting much hotter weather later this week, futures could move back up in a few days.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.