China cuts rates to try to support the economy at a time when the physical oil market tightens. The People’s Bank of China on Monday cut the seven-day reverse repo rate to 1.7% from 1.8%, and minutes and lending rates were lowered by the same margin at the monthly fixing. Oil got a bounce but faded. Yet there is still support because even as China’s economic outlook is uncertain, the oil market is tightening anyway. We have discussed the tightening physical market, and it is starting to get more attention.

Bloomberg News and Zero Hedge reported that, “oil prices may have been confined to a tight range this month, but an array of signals from the physical market suggest the next move could be a break to the upside.” Bloomberg is pointing out the same thing we mentioned last week and that was the spreads in the markets that suggest a growing oil global oil supply deficit.

Last week U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.9 million barrels from the previous week. At 440.2 million barrels, U.S. crude oil inventories are about 5% below the five-year average for this time of year. They write, “First of all, there are the time-spreads between monthly futures contracts, which have shown a strengthening premium on prompt deliveries over the past six weeks as US driving demand climbs toward its summertime peak. The so-called flat price of crude has lagged, pressured by concerns over the global economy, but sooner or later may need to catch up. They say “The entrenched premium on prompt supplies — known as backwardation — indicates that global oil inventories are depleting at the swift pace anticipated this quarter by forecasters like the International Energy Agency. This is substantiated by a hefty decline in US crude inventories, down by roughly 20 million barrels over the past three weeks.”

More than likely this week we will see those crude oil Inventories in United States fall even further. I expect to see at least a 3 million barrel draw on crude oil this week but there is some talk that the draw may be even larger. Last week U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.9 million barrels from the previous week. At 440.2 million barrels, U.S. crude oil inventories are about 5% below the five-year average for this time of year.

Biden may be out but his spending on green energy craziness continues. Reuters reports that, “The Biden administration on Monday announced 25 projects pitched by 30 different state, local and tribal governments that applied for $4.3 billion in grants created by the president’s signature climate law. The grants, which will be distributed to winners by early autumn, will support deployment of clean energy technology across sectors ranging from housing to agriculture. The U.S. Environmental Protection Agency (EPA) said it has reviewed nearly 300 applications that requested over $30 billion. The administration has said the selected projects when combined would reduce greenhouse gas pollution by as much as 150 million metric tons of carbon dioxide equivalent (CO2e) by 2030, or roughly 2 percentage points. The U.S. has pledged to slash its CO2e emissions by 50%-52% by that year.”

Yet will it really. So far, the projections by the Biden administration have missed the mark as far as reducing greenhouse gas emissions and by the green energy jobs that they promised. They have missed the mark on global energy security as the risk to move oil and gas is higher than it has been in decades.

On Monday Reuters reported that, “Russian Foreign Ministry spokeswoman Maria Zakharova on Tuesday accused Ukraine of using the issue of energy transit via its territory as a “manipulation button”, the TASS state news agency reported. Slovakia and Hungary said earlier this month that they had stopped receiving oil from Russia’s Lukoil through the Druzhba pipeline after Ukraine imposed a ban last month on the transit of resources from Lukoil via Ukrainian territory. A senior Russian oil industry source said on Tuesday that oil transit had not resumed.

Crack spreads are trying to improve but have been relatively weak over time. Products are looking a little bit better technically and the focus will be on demand today.

Natural gas is rising in increased demand expectations due to power generation, but producers are still struggling with an era of historic low prices. The Energy Information Administration reported that, “U.S. wholesale natural gas spot prices fell to record lows in first half 2024. The average monthly wholesale spot natural gas price at the U.S. benchmark Henry Hub fell by 20% to $2.56 per million British thermal units (MMBtu) between January and June of this year, according to data from Refinitiv Eikon. In January, the Henry Hub price averaged $3.18/MMBtu, then dropped to $1.49/MMBtu in March, marking the lowest average monthly inflation-adjusted price since at least 1997. In addition, prices from February through April 2024 were the lowest ever recorded for these months.

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