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EIA Crude Stocks and the Energy Rebound

0 1,394

After falling through most of the month, crude prices finally hit a rebound this week.

Generally, the weakness can be incidental to concerns over the potential slowing of the economy because of the delta variant. But that might be too superficial of an analysis.

During the same period, the dollar gained strength, suggesting another explanation. This is the consensus that we’d see the Fed announce their forthcoming taper later this week. But a lot of analysts are now beginning to suggest that the announcement could come later.

Moreover, the weaker dollar over the last couple of days has been a factor in the price of crude.

It’s geopolitics

Throughout most of the month, the US has been calling for OPEC to increase production, citing worries over future supply.

However, OPEC+ has so far resisted those calls. The latest report showed that compliance with cuts is 109%, suggesting that most members are not eager to increase production.

From a domestic political standpoint, higher crude prices are a challenge for the US, particularly as the Fed faces higher inflation.

According to the BLS, gasoline alone accounts for 2.8% of annualized inflation. With crude prices double what they were last year, this is an important component of price issues.

Balancing out inflation

On the other hand, higher inflation means that the actual price of crude isn’t as high when measured in real terms. With dollar inflation plateauing at 5.4%, there is greater interest in holding a commodity to hedge against the loss of value in the currency.

That said, the next factor is going into the fall. This is when there is a rise in energy demand for heating, and that puts tailwinds into natural gas.

Overall many utilities “front-load” their buying throughout the summer, so we could see inventories finally turning around.

Where we are going

The latest OPEC monthly report still expects tightening next year.

However, what might be bad news for the Biden Administration is that they cut their expectations for oil demand this year slightly to 27.4M barrels per day.

It’s unlikely the cartel will show an interest in raising production in the near term if they see consumption dropping off over the next six months. And OPEC inventories are still below the 5-year average.

Economists expect September’s jobs report (which comes out on the first Friday of October) to show a significant increase in hiring.

That implies a significant increase in driving in the US, as people commute to work. This is another reason for a temporary bump in inventories ahead of an expectation of higher demand throughout the coming month.

A short-term uncertainty concern could have a negative impact on crude.

But as long as there is a long-term expectation of higher prices, then drops in price are likely to be corrections in the medium term. Unless the dollar finds some significant strength, such as unexpected hawkishness out of the Fed.

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