Energy: Delta Dawn

The massive sell-off due to concerns about the delta variant of the coronavirus seems to be taking a back seat to concerns once again about the tightening of the global oil supply. The Wall Street Journal reported that “the highly contagious Delta variant of Covid-19 doesn’t pose an immediate risk to the strength of the U.S. economic recovery, with analysts expecting a robust expansion to continue in the second half of the year.” And if indeed that is the case, then it's clear that the sell-off in oil on that tumultuous Monday was way overdone and that is why we're seeing prices recover quite impressively.

While we did see a surprise increase in crude supplies breaking eight weeks of declines, it was caused in part by a big surge in imports that may have been overstated due to the 4th of July holiday reporting period. The EIA reported that U.S. commercial crude oil inventories increased by 2.1 million barrels from the previous week. At 439.7 million barrels, U.S. crude oil inventories are about 7% below the five-year average for this time of year.

Photo by Timothy Newman on Unsplash

The market is starting to focus on the rate of decline in oil supply at the all-important Cushing, OK delivery point. Market watcher Tim Dallinger pointed out that Cushing's levels have now fallen below the lowest level we have seen in the last five years except for 2018. He says that we can expect another 8ish week of draws for the summer driving season. The trajectory likely arrives at a storage level that is very tight operationally.

So if Cushing drains, Midwest refiners are going to have to look elsewhere for oil and that may be one reason we are seeing an uptick in imports. U.S. oil producers are not rising to the occasion and so we're becoming more and more dependent on foreign oil. It also means that gasoline prices are probably going to continue to stay strong and while we might see a little setback, the trajectory for retail prices is still going to be strong as we get into August. The EIA reported that gasoline inventories decreased by 0.1 million barrels last week and are at the five-year average for this time of year.

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