Fly In The Ointment

Demand is rising, and production is falling, but China might be the fly in the oil market ointment. The Energy Information Administration report (EIA)t was a feel-good story about the resilience of American people and the American economy and the road back as oil and gas demand were on the rise, and that gave a boost to petroleum prices.

Oil prices are giving back their demand growth inspired gains as it is concerned about rising tensions between the U.S. and China. President Trump is going to have a press conference about China’s new security law for Hong Kong, and oil traders are concerned that this could lead to another US-China trade war and kill oil demand. That demand has shown signs of coming back much more energetic and faster than most people had expected in China and the U.S. as well. A big jump in U.S. oil refinery runs, and a leap in U.S. gasoline demand had oil traders driving prices to post-coronavirus highs.

Demand increases are coming as U.S. production continues to plunge and report overnight that OPEC oil production has crashed by 6.3 million barrels per day to 23.75 million barrels per day in May, according to JBC data. All of this would suggest that the world is going to see the global oil oversupply start to disappear as long as we don’t take a big step back with another trade war.

The EIA numbers were encouraging. While the overall commercial crude oil inventories increased by 7.9 million barrels from the previous week, we saw a big 3.395 million-barrel draw at the Cushing, Oklahoma delivery point. We also saw a 3.96 million barrels drop in the Midwest crude oil supply. The reason for the build was a 10.249 million barrel build on the Gulf Coast. We also saw 2.11 million barrels of oil go into the Strategic Petroleum Reserve at 534.4 million barrels. Crude oil inventories are about 13% above the five-year average for this time of year.

Yet refinery runs and gasoline demand were on the rise, and that shows that as the U.S. starts to open up its economy, demand for oil will spike. We saw gasoline demand snapback to 7.253 million barrels a day. Total motor gasoline inventories decreased by 0.7 million barrels last week and are about 10% above the five-year average for this time of year.

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