Fed Chairman Jerome Powell’s testimony took its toll on oil and a bearish report from the American Petroleum Institute (API) isn’t helping either. The Fed chairman boosted the dollar soaring which pressured many commodities as he told the Senate Banking Committee “ that Several years” of strong jobs, low inflation still ahead of us. That may be great news for those that fear that there is a recession around every corner, but he is still warning that a trade war "If it results in broader, higher tariffs across a broad range of traded goods or services that remain that way for a longer period of time, that will be bad for our economy and for other economies too."

Oil tried to shake off the strong dollar as the August crude options expired, in part because there were expectations that despite the promise of more oil from OPEC, and a possible release from global oil strategic reserves, that we would still see a substantial crude oil supply drawdown. Well, the API dashed those thoughts for the moment, shocking the traders with an increase of 629,000 barrels. While part of the crude increase by the API might be an attempt to get in line with the Energy Information Administration (EIA) number that showed a 12.6-million-barrel crude oil draw last week. So really this puts a lot of importance on today’s EIA oil number to see if the API build is real or just playing catchup.

Yet, another disturbing number in the API was the large 1.71-million-barrel increase in distillate supply. That increase seems to raise fears of demand destruction. Some might take this as an early warning sign that high diesel prices or trade war fears are starting to show warning signs that things economically may be cooling down. We think those fears are being overstated and again we will look to the EIA to get the rest of the story at 9:30 central standard time. In Fact, the Wall Street Journal wrote “The manufacturing sector staged a quick turnaround in June, after a fire at the plant of a Ford pickup-truck supplier knocked output lower the previous month, extending a solid run of growth for U.S. industrial activity. Manufacturing production has been rising since mid-2016 when rising oil prices helped reverse a hit to U.S. energy production. Manufacturing output is now up 4.2% since May 2016 and up 22% from a recession low in June 2009, according to Fed data.”

The crude in Cushing though is still undoubtedly falling. The API reported that crude supply in the delivery hub fell by 1.71 million barrels. The Syncrude outage still taking its toll. On July 9, Syncrude oil sands project in Western Canada will resume some production in July, sooner than expected, and hit full capacity in September. Gasoline Inventories also rose according to the API. The reported increase of 425,000 barrels suggests a bit of demand softness after the Fourth of July holiday.

Yet, despite the softness and the big post-holiday correction in the oil market, it is too early to say that the bears are in the clear. In fact, just the opposite. DTN writes that there are media reports of continued protests at Iraq's Zubair oil field and reports Libya's National Oil Corp declared force majeure on oil loadings at its Zawiya port Monday, following recent attacks and a kidnapping at its Sharara field causing production declines totaling 125,000 barrels per day (bpd). They also say that supplies from Venezuela also are set to decline as much as 700,000 bpd over the next several weeks, according to Reuters, as four crude upgraders go down for scheduled maintenance.

“Iraqi police wielded batons and rubber hoses to disperse about 250 protesters gathered at the main entrance to the Zubair oilfield near Basra on Tuesday, as unrest across southern cities over poor basic services gathered pace”, according to Reuters.

Jerome Powell’s upbeat assessment on the U.S. economy suggests no recession in site, so the prospect for oil demand remains on an upward trajectory. The Oil market is close to being structurally undersupplied and we are going to need more oil from OPEC and the SPR to avoid shortfalls. We’d expect a lot of volatility over the next few weeks, yet we are still on track for a big year-end rally. Use the weakness to put on long-term bullish strategies. Look to get hedged as we could see supply get squeezed.  

For Natural Gas, EBW Analytics Group says that the front-month natural gas contract continued to grind lower early this week, with moderating weather forecasts chipping away at cooling demand. Absent any clear bullish catalyst in the near-term, NYMEX futures are likely to continue to slip lower, albeit at a slower pace than the declines seen since late June. For now, however, the natural gas market appears unconcerned with projections for the lowest end-of-season inventories of the shale era.

Mid-November storage projections continue to decline, with the recent production surge helping to “de-risk” the adequacy of winter supplies. Moreover, weak calendar spreads indicate little impetus to rapidly rebuild gas stocks, while the August 2019 contract, currently trading below the front-month, may presage still further declines ahead. Natural gas and renewables have dominated year-to-date capacity additions and will likely comprise almost all new generation projects going forward.