Global oil prices are holding up better than most commodities as the Federal Reserve starts to send signals that perhaps this inflation thing isn't transitory after all. The Fed, in their new dot plot, penciled in the probability that interest rates will increase two times in the year 2023. The reason for the “shocking change” is because Jerome Powell is seeing inflation rise much faster than he and other Fed officials expected. Powell says he now expects that shifts in demand can be large and rapid and that inflation could turn out to be higher and more persistent than we expected. Who knew that if you printed a record amount of money and gave money away for free! that it could cause inflation.

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The Federal Reserve has now raised its inflation forecast to 3.4%, much higher than the previous forecast. While the Fed still thinks that inflation is transitory and being driven by the re-opening of the economy, it is now getting a little bit nervous that these inflation expectations can be more ingrained. If inflation continues to surge, it would do more damage to the longer-term economic forecasts.

The oil price situation is especially worrisome for the Federal Reserve. Under-investment in the sector could lead to a long-term, persistent inflationary trend in the price of oil. We all know that despite the movement to get off fossil fuels, in the short term, the global economy still runs on oil. China for example just saw its refinery runs hit a record high. Reports say China is having a hard time finding enough clean fuel so they're burning dirtier fuel to meet this surge in global re-opening demand. I am sure the environmentalists are gonna love that.

The impact of stimulus around the globe and the low-interest-rate environment is further fueling the inflationary pressures. The Fed probably has the tools to cool things off and we're seeing that with just the threat that interest rates could go up eventually. Yet while the Fed is good at printing money, they are not very good at printing oil.

And that's too bad because the world right now is seeing global oil supplies fall at a very fast pace. Even before I get into the Energy Information Administration's reports huge drop in U.S. oil supplies, we should probably focus on a report that's going to give us an indication of what supplies may be next week.

Private forecaster Genscape reportedly said that the supplies in Cushing, OK last week fell by a dramatic 3 .027 million barrels. If that drop proves to be correct, it would be one of the biggest drawdowns in the Cushing, OK delivery point in history. It signals that the U.S. refining sector is responding to this increasing surge in demand. The problem is that we're not seeing the oil supplies build fast enough on a global scale to meet that demand. If you take a look at the Energy Information Administration (EIA) report you see some more bullish indicators that it's going to signal a further tightening of global oil supplies in the next few months.

One of the most bullish aspects in yesterday's Energy Information Administration report was refinery operations. The EIA reported that U.S. crude oil refinery inputs hit 16.3 million barrels a day which is putting the refining capacity number back up towards 92.6% of operable capacity. We saw a surge in gasoline production as well as an increase in distillate fuel production. We continue to see a large number of crude oil imports hitting 6.7 million barrels a day, which was up from 108,000 barrels a day the previous week. That also led to a big drawdown in crude oil supplies to the tune of 7.4 million barrels from the previous week. So much for that crude oil global glut with supplies now 5% below the average for this time of year.

We expected gasoline demand to bounce back and I think it's very interesting if you look at the four-week moving average, we're starting to see U.S. oil demand look healthy, perhaps the most healthy it's looked since the coronavirus shut down. The EIA said the demand, based on total product supplied over the last four weeks, hit 19.3 million barrels a day. That is pretty impressive. Gasoline demand averaged 9.1 million barrels a day and that is up 19.3% from last year. Distillate fuel demand hit 4,000,000 barrels a day and that is up 24.8% from last year and jet fuel was up 86.8% from last year so you're seeing that dramatic rebound from where we were in the worst of the economic shutdown.

The market should also realize that we really could use the return of Iranian crude oil to meet searching global demand. The problem is it looks less likely that is going to happen. The French delegates suggested that the two sides are far apart and even though Iran has agreed to extend some modest weapons inspections to keep the talks going, it is unlikely that these Iranian nuclear talks are going to bear fruit. If there is any hope that these talks will bear fruit, it will be after the election on Friday in Iran when we will know who the new president is. If there is a change in the president, it means a move to the hardline faction in Iran and that means a deal will be less likely. If President Rouhani is re-elected, then the odds of a deal go up.

We all know that oil companies are going more green and by that I mean they're going to be putting more green in their pockets. Big oil makes big profits when oil prices go up, so as big oil pulls back from traditional oil sources, they're only going to be lining their pockets with more green. Environmentalists who hate big oil companies are probably gonna seethe with envy as big oil profitability goes up as supply goes down. Probably the best thing to happen to big oil's bottom line is this movement towards green. In another age, politicians would be complaining that oil companies are not producing enough oil to meet the demand in order to line their own pockets. In this day and age politicians are now encouraging energy companies to drive up energy prices. Oh, how the world has just changed in such a short period of time. Politicians are going to force big oil companies to make big profits and they probably couldn't have done it without the environmentalist's help.

India's oil demand is also bouncing back. Argus reported that India's motor fuel demand has picked up after many states eased lockdown and restrictions following a decline in covid-19 cases, industry and market participants have told Argus. A total number of cases rose to 29.7 million in India, making it the second most affected region after the U.S., but the daily increase has fallen to about 62,000 new cases from around 400,000 in early May.

The easing of lockdowns in the north and west of India has increased demand for diesel and gasoline, an official at a state-controlled refiner said. Diesel and gasoline consumption rebounded in the first half of June by 12pc and 13pc respectively from the same period in May, according to data from state-controlled refiners that account for around 90pc of the country's fuel sales. State-controlled oil companies had increased their refinery run rates in anticipation that fuel demand would recover in the coming months.

Natural gas pulled back a little bit but today we get the Energy Information Administration report on supply. We're looking for an injection of 76 bcf.

Natural gas and crude oil will also have to be on hurricane watch as we are seeing a tropical disturbance in the Gulf of Mexico that is likely to turn into a tropical storm within the next 24 hours. The storm is right now near the Bay of Campeche but some weather models have it turning towards the heart of the U.S. refining sector. I would expect that we're going to see some shut ends on Gulf of Mexico production and refiners on shore getting ready to batten down the hatches.

For both oil and gas we may see a correction yet we still believe that there is significant upside risk in the price of both. For the last year, we have been warning people that the bottom and well were in and that we were in a cyclical bull market that could continue for a long period. More and more people are starting to realize the seriousness of the potential of an oil market that's going to be undersupplied. Please be prepared for some of the worst-case scenarios.