Oil prices are pulling back a bit this Monday morning on questions about what is an appropriate response to the alleged drone attack on an Israeli ship by Iran and the appropriate response to the delta variant of the COVID-19 virus.

The Wall Street Journal reported that, ”the U.S. joined the U.K. and Israel Sunday in blaming Iran for a fatal drone strike last week on an Israeli-linked tanker near the coast of Oman in the Arabian Sea, and the U.S. said it would work with allies to develop a response to the incident. The statement from Secretary of State Antony Blinken marked unusually blunt language from the Biden administration, particularly as it is also seeking to revive a nuclear deal with Iran. “Upon review of the available information, we are confident that Iran conducted this attack,” Mr. Blinken said. “We are working with our partners to consider our next steps and consulting with governments inside the region and beyond on an appropriate response, which will be forthcoming.”

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What’s a Monday without virus news. Here’s the latest. Bloomberg reports that the, “virus is clouding the outlook for consumption across the Asia Pacific. China faces a fresh outbreak, Thailand is set to expand its quasi-lockdown measures, and infections in Sydney matched a record. Data showed China’s economic activity eased in July, implying a more steady recovery as risks mount.”

Yet in the U.S., demand is soaring. Gasoline demand reportedly increased again and is staying near-record levels even as the national average for gasoline hit $3.176 a gallon. That pain is being felt in California where the average price for regular unleaded is 4.379 a gallon.

Taxes and regulations and logistics are a big part of California's woes but it is hitting Illinois on the tax front. Zero Hedge reports, “As gas prices jump in Illinois, so do the gas taxes Illinoisans must pay. Illinois is one of just four states to impose a general state sales tax on gasoline, and that’s helped push Illinois’ gas taxes to the 2nd-highest in the nation, according to the American Petroleum Institute. Illinoisans pay an additional 6.25% for every gallon of gas, on top of the standard excise taxes that were doubled in 2019. Hawaii, Indiana, and Michigan are the only other states that apply their general sales taxes to gasoline (UGA).

The question I have, with all the revenue that Illinois brings in with high taxes, toll roads, etc., is how can the state be broke? Years of corruption, mismanagement and a crazy pension system is bleeding this state dry. Sales taxes go up, property taxes go up and the people of Illinois continue to get squeezed and it's a shame.

Bloomberg reported that Russia increased oil production in July for the first time in three months after more generous quotas were extended to the entire OPEC+ alliance. Producers pumped 44.24 million tons of crude and condensate last month, according to preliminary data from the Energy Ministry’s CDU-TEK unit. That’s about 10.46 million barrels a day, or 0.3% higher than in June. The  Bloomberg monthly OPEC oil output survey showed that several nations out of 13 in the cartel were unable to increase production in July, despite higher quotas and prices. Overall OPEC output did increase thanks to higher Saudi output. 

The Russian and OPEC compliance numbers seem to suggest that the OPEC plus bond is closer than ever. Oh sure, it's easy to be chummy when oil prices are high and things are going your way, still, the compliance numbers suggest that OPEC plus is going to be a force in the oil market for some time to come. The oil market is still uncertain about the impact of the delta variant of the COVID-19. While there is some evidence of some weakness in the Chinese data, most of the data suggest strong demand and an oil market that is going to be undersupplied.

Natural gas (UNG) is given some support on weather forecasts that showed the heat will return after a brief cool-off. Andrew Weissman of EBW analytics says despite a bullish injection, September natural gas—now the front-month—posted a net loss last week. Market drivers included: (i) progress in returning to full service on Tetco; and (ii) very mild weather to start August, which moved prices at Henry Hub below $3.90 on Friday. Natural gas futures have held up better than expected given the severity of the early August cool spell. With only a few days of very mild weather left, however, and models predicting much hotter weather later this week, futures could move back up in a few days.