Oil prices are on the rebound on the perception that yesterday's sell-off was overdone. The sell-off was attributed to the rising dollar as well as concerns that new strains of the COVID-19 virus might hurt demand at some point in the future. Yet the demand destruction argument we've been hearing so much about has not been confirmed by the data. Last week the Energy Information Administration (EIA) reported that US petroleum demand hit an all-time high. There are reports that Europe's gasoline demand is back to normal. While jet fuel demand still lags, overall demand continues to surge higher in many places.

The market also is coming to grips with the fact that the US gas production will come back only slowly from Hurricane Ida. As of now cumulative true oil production losses are over 20 million barrels of oil lost. That number will soon exceed 30 million due to the slow production come back. The Bureau of Safety and Environmental Enforcement (BSEE) reports that as of yesterday approximately 79.33% (1,443,800 barrels) of the current oil production in the Gulf of Mexico is shut-in. BSEE estimates that approximately 77.89% of the gas production in the Gulf of Mexico is shut-in.

Some pointed to the fact that Iran’s new hardline president said that he was willing to come back to the negotiating table. Zerohedge reported that, “Over the weekend President Raisi held a phone conversation with French President Emmanuel Macron in which the two discussed resuming Vienna talks. And just before this, Raisi had warned against more sanctions coming from the West: On September 4, Raisi told state television that his government is "pursuing outcome-oriented negotiations" as a diplomatic way to resolve the dispute over its nuclear program. But these should take place without any "pressure" from Western countries, he warned.

Yet today the Wall Street Journal reports that, “Iran is refusing to allow inspectors access to nuclear-related sites and hindering a probe by the United Nations atomic agency while continuing to expand its nuclear activities, the International Atomic Energy Agency said in two confidential reports Tuesday, casting doubt on efforts to revive the 2015 nuclear deal. The reports leave the Biden administration and its European allies facing a choice between pushing for a formal rebuke of Iran—which Tehran’s new hard-line government has warned could scuttle the resumption of nuclear talks—or refraining from action, potentially undercutting the authority of the IAEA and its leadership. The future of the nuclear deal is already in the balance. New Iranian President Ebrahim Raisi, pressed by European and U.S. officials to quickly resume the talks on restoring the deal, has said his government is prepared to return to the Vienna negotiations but refused to fix a date. The last talks took place in June.”

For oil traders, this means that anyone betting on a quick return of Iranian oil will have to wait. Legal oil that is. Iran exports are close to three million barrels a day.

Gasoline prices at the pump according to AAA have stabilized at $3.18, which is just 3 cents more expensive on the week. The storm took about 13% of U.S. refinery capacity offline and while there are no firm re-start dates, refineries are expected to be back online this month. Gasoline stock levels are currently at 227.2 million bbl, which is a healthy level. However, stock levels could tighten until refineries resume normal operations. Typically, a constraint on stocks would mean higher gas prices, but with demand expected to decrease going into the fall, price fluctuation should be minimal. Today’s national average is the same as last month, but 96 cents more than a year ago.

My take on gasoline prices is that they probably are going to stay strong at a time when normally gasoline prices fall. I think it's at some point refineries don't get back up and running but we could see a price spike going into the holiday season. We also expected a rebound in the price of crude though we are on resistance today. Remember we should be in the calm of the supply and demand storm now that the shoulder season is upon us but this winter we expect very strong prices for oil and natural gas.

The downside risk is covid. MSN reports, “Since being discovered in Colombia in January, the mu variant of COVID-19 has spread to nearly four dozen countries and has made its presence known in Hawaii and Alaska. It has so far been found in 49 states with Nebraska being the only state to not have a mu variant case detected. Health officials believe mu is even more transmissible than the delta variant and has the potential to resist vaccines.” Oh boy.