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“The inflation has peaked” narrative took a big step backward after the consumer price index defied the whisper numbers that suggested that inflation would come in lower and came in higher than expectations. Stock market rebounding optimism ended and red hot precious metals plunged on a surging dollar after the Bureau of Labor Statistics reported that in August, the Consumer Price Index for All Urban Consumers increased 0.1 percent, seasonally adjusted, and rose 8.3 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased by 0.6 percent in August; up 6.3 percent over the year.

What was terrible news for the Biden administration did have one bright spot for a moment? The surging dollar caused a sharp drop in the price of crude oil as well as the historically tight distillate inventories. The Biden administration couldn’t keep a good thing going when later in the day they reversed oil back to the upside by suggesting that they were going to refill the strategic petroleum reserve for $80.00 a barrel. Now I don’t want to get into how much money the Biden administration has cost American Taxpayers by exporting our Strategic Petroleum Reserve oil to Europe and the rest of the world but I want to point out that the exports of oil products from the U.S. in August hit an all-time high.

What I do want to talk about is how badly the Biden administration policies have left US refineries with extremely low levels of crude oil, increasing the risks of gasoline and diesel price spikes later this winter. The Biden administration admitting that they have to refill the reserve is an admission that their policy of using the strategic petroleum reserve for political purposes will backfire. The administration is now acknowledging that they have to be prepared for a winter price spike and that means that surging inflation may not be over at the gas tank or when you pay your heating bills. What was stunning in yesterday’s report was what Americans had to pay for electricity.

Naureen S. Malik at Bloomberg wrote that “August electricity bills for US consumers jumped the most since 1981, gaining 15.8% from the same period a year ago, according to the US Bureau of Labor Statistics. Natural gas bills, which crept back up last month after dipping in July, surged 33% from the same month last year, labor data released Tuesday showed. Broader energy costs slipped for a second consecutive month because of lower gasoline and fuel oil prices. Even with that drop, total energy costs were still about 24% above August 2021 levels according to Bloomberg.

In the meantime, OPEC is still showing its displeasure with the actions of the Biden administration to intervene in the market. OPEC still claims that the price of the futures is still out of whack with the physical market and that may force them to cut production in the future. If OPEC cuts production when the Biden administration starts to buy, that could tighten supplies even more. Still, we did see an increase in OPEC oil production as it increased by 618,000 barrels a day back to 29.65 million barrels a day. The increase was led by Saudi Arabia and Libya which seemed to be coming back online at least for the moment. Yet at the same time, OPEC is still short of its quota by a long shot.

Oil watcher Tim Dallinger at the same time though is worried about the trajectory of US production as the right count in the Permian basin continues to fall even though production is rising. It is rising because of the reopening of previously capped wells. If the rig count falls, the Energy Information Administration’s prediction of rising US oil production may be wrong. One of the key reasons why the Permian basin rig count is falling is due to concerns about new regulations by the Biden administration. Investors do not want to invest in this uncertain environment and that is going to hurt US oil production down the road.

The American Petroleum Institute report yesterday did report a sizeable 6.035-million-barrel increase in oil supplies. Of course that never would have happened without the huge release from the Strategic Petroleum Reserve of 8.4 million barrels. The market is going to have to face the reality that the Strategic Petroleum Reserve releases are going to be coming to an end. The SPR is going to become a buyer instead of a seller and that should further support oil prices in the future.

The API reported a draw in gasoline inventories of 3.23 million barrels for the week ending September 9, on top of the previous week’s 836,000-barrel draw. Distillate stocks saw a build of 1.75 million barrels for the week, on top of last week’s 1.833-million-barrel increase.

Reuters reports some bullish data from the International Energy Agency. The IEA expects large-scale switching from gas to oil, estimated to average 700,000 barrels per day (bpd) from October 2022 to March 2023 – double the level of a year ago. The IEA said global observed inventories fell by 25.6 million bbl in July. This follows forecasts from the Organization of the Petroleum Exporting Countries on Tuesday for growth in global oil demand in 2022 and 2023, citing signs that major economies were faring better than expected despite challenges such as surging inflation.

Diesel prices are unexpectedly plunging after the big run but don’t be fooled. Inventories are near the five-year average lows. All around the world gasoline is holding up better because we all want refiners to still have an interest in making gasoline. Going into winter there are still significant upside risks for oil and products. The volatility will remain high but we think the concerns about a slowdown in demand are being overstated. There is no doubt that Chinese oil demand had the biggest drop in 30 years according to the International Energy Agency but we expect that that is a rearview mirror number and should increase dramatically when China reopens and we do expect China will reopen.

Natural gas held up very well despite the onslaught of many other futures contracts. EBW Analytics writes that after repeatedly holding key technical support at $7.75-$7.88/ MMBtu, October bounced higher this week and appears poised to extend gains ahead of an impending heat wave and threats of disrupted railroad coal shipments. Still, relenting weather into the last week of September, a potential resolution to coal supply concerns, and the potential for outsized storage build into early October as Cove Point LNG undergoes maintenance and ERCOT wind rebounds, pose the potential for a renewed downturn in NYMEX futures. By late fall, a thin market with a price-inelastic demand curve and substantial upside potential remains likely to bolt higher should any bullish catalysts materialize. While the bullish story could begin to crack before the year-end of 2022, another notable run higher for NYMEX futures remains likely first.

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