If you compare the price of oil to other commodities like gold, silver, copper, soybeans and other grains, I guess you could say that the price of oil looks downright bullish in comparison. Oil prices got caught up in the Fed frenzy mini taper tantrum as well as action by the Chinese government to try to cool commodity prices. The dollar went up and commodity prices got crushed. Grains in particular because of the possibility that drought-stricken parts of the farm belt will get some much-needed rain. Yet it is doubtful that these rains are going to be enough to break the drought conditions.

China's attempts to cool off commodity prices by releasing metals and grains from their reserves may actually make the situation worse. The reason commodity prices are going up so much is that demand is ahead of supply. The only way to solve that problem is to allow commodity prices to go up to a level that will either cool demand or stir investment to increase supply. The problem with China's intervention in the commodity markets is that it may not allow the type of investment that's going to be needed to meet this type of demand.

China's talk of instituting price caps on commodities and cracking down on commodity price speculators will actually have the opposite effect. One of the first rules of commodities is that if you put on a price cap, it will eventually lead to shortages. Maybe not today, maybe not tomorrow but eventually, it will lead to shortages. China has to be very careful with this commodity price intervention. The world right now is facing supply chain issues and commodity shortages and this type of intervention by the government could only make things worse. China needs to buck up and allow the market to work. China needs to allow high prices to cool demand but their actions are only going to heat demand. When China artificially lowers the prices of commodities, the demand side will only increase. That will further exacerbate shortages. Because the prices are artificially low it will not allow investment to the extent that is gonna be needed to meet future demand.

That is also true of the oil market. Oil prices are starting to realize that we are facing a world where demand is expected to hit all-time highs but the investment in oil production and natural gas is going to fall short of our meet demand in the future. 

The Biden administration's big bet on alternative energy sources looks like it will be a loser as the alternatives have little chance of getting up to speed to meet demand in the future. The Biden administration needs to take a more measured approach to their climate change policies and not try to kill oil and gas investment because we're going to need a lot of oil and gas.

The Biden administration also has to realize that by moving a lot of the energy grid to wind and solar it's not going to be as reliable. Extreme temperatures in California and Texas are already causing those states to warn of potential blackouts and telling customers to reduce their usage. It is worrisome to contemplate the amount of land it's going to take to build millions of solar firms to meet solar energy demand and that will take away valuable farmland that normally would be used for food. This could lead to a further dislocation of supply.

If we look at the global stocks to use ratios for all the major grain markets, it is the tightest we've seen in almost a decade. Drought conditions in the United States may ease a bit with this rain. It's going to be up to the U.S. farmer to bail the globe out of a food shortage due to of sub-par crops in Brazil and other parts of South America as well as booming demand for food in China and India and in other parts of the world.

The break in oil and products is probably a good time to put on hedges if you're not already hedged. We expect another big drawdown in crude oil inventories next week and we expect to continue to rebound in gasoline demand to expand. The supply response to the demand has been less than adequate and we believe that we're going to be on a path to higher prices over the next few years.

John Kemp at Reuters reports that U.S. cooling demand has run almost +11% above the long-term average so far in 2021. After a fairly ordinary start to the year, the number of population-weighted cooling degree days has been well above average since the start of June. Nonetheless, cumulative demand is still below the same point in three of the last four years (2020, 2018, and 2017).