The Energy Report 06/14/19

It Wasn’t Us

Iran claims that they had no part in the terror attacks on two oil takers even though the U.S. accused them of doing it and provided video to prove it. The operation according to the U.S. had the markings of the Iranian Revolutionary Guard all over it and the U.S. even provided video.

Secretary of State Mike Pompeo gave a press conference and tweeted “It is the assessment of the U.S. government that Iran is responsible for today’s attacks in the Gulf of Oman. These attacks are a threat to international peace and security, a blatant assault on the freedom of navigation, and an unacceptable escalation of tension by Iran.”

Of Course, Iran says its fake news and if indeed Iran leadership did not order the attack, it is entirely possible that some in the Iranian national Guard have decided to act out on their own.

In the meantime, oil prices are pausing as the U.S. says it wants to avoid war with Iran and concerns about weakening oil demand growth. Bloomberg News reported that “Hours after Pompeo spoke, officials with U.S. Central Command issued a statement saying that a war with Iran is not in our strategic interest, nor in the best interest of the international community.”

Yet oil prices are also getting pressure from concerns about slowing oil demand growth. The IEA lowered their oil demand forecast.

The IEA says that ”The consequences for oil demand are becoming apparent. In 1Q19, growth was only 0.3 mb/d versus a very strong 1Q18, the lowest for any quarter since 4Q11. The main weakness was in OECD countries where demand fell by a significant 0.6 mb/d, spread across all regions. There were various factors: a warm winter in Japan, a slowdown in the petrochemicals industry in Europe, and tepid gasoline and diesel demand in the United States, with the worsening trade outlook a common theme across all regions. In contrast, the non-OECD world saw demand rise by 0.9 mb/d, although recent data for China suggest that growth in April was a lackluster 0.2 mb/d. In 2Q19, we see global demand growth 0.1 mb/d lower than in last month’s report. For now, though, there is optimism that the latter part of this year and next year will see an improved economic picture. The OECD sees global GDP growth rebounding to 3.4% in 2020, assuming that trade disputes are resolved, and confidence rebuilds. This suggests that global oil demand growth will have scope to recover from 1.2 mb/d in 2019 to 1.4 mb/d in 2020.

Meeting the expected demand growth is unlikely to be a problem. Plentiful supply will be available from non-OPEC countries. The US will contribute 90% of this year’s 1.9 mb/d increase in supply and in 2020 non-OPEC growth will be significantly higher at 2.3 mb/d with US gains supported by important contributions from Brazil, Canada, and Norway. Later this month, Vienna Agreement oil ministers, faced with short-term uncertainty over the strength of demand and relentless supply growth from their competitors, are due to discuss the fate of their output deal.

Ministers will note that OECD oil stocks remain at comfortable levels 16 mb above the five-year average. However, they will also note that although in 1Q19 weak demand helped create a surplus of 1.1 mb/d, in 2Q19 the market is in deficit by an estimated 0.4 mb/d, with the backward dated price structure reflecting tighter markets. This deficit is partly due to the fact that in May the Vienna Agreement countries cut output by 0.5 mb/d in excess of their committed 1.2 mb/d. In 3Q19, the market could receive further support from an expected pick-up in refining activity.”

Yet at the same time we should also be worried about the longer-term consequences of Freedom Gas, LNG. Almost 29% of LNG goes through the Strait of Hormuz and the potential explosive power of any LNG tanker being blown up is very risky. This comes as LNG and LNG demand is soaring.

 The Daily Energy Insider reports that “A recently released International Energy Agency (IEA) report maintains natural gas demand grew 4.6 percent last year, representing its fastest yearly pace since 2010. “Natural gas helped to reduce air pollution and limit the rise in energy-related CO2 emissions by displacing coal and oil in power generation, heating, and industrial uses,” IEA Executive Director Fatih Birol said. “Natural gas can contribute to a cleaner global energy system. But it faces its own challenges, including remaining price competitive in emerging markets and reducing methane emissions along the natural gas supply chain.”

The analysis determined global demand for natural gas is slated to continue growing over the next five years, buoyed by strong consumption in fast-growing Asian economies and supported by the continued development of the international gas trade.

China is expected to account for more than 40 percent of global gas demand growth to 2024, spurred by the government’s goal of improving air quality by shifting away from coal, officials said, adding strong growth in gas consumption is anticipated in other Asian countries, particularly in South Asia.

Liquefied natural gas (LNG) at sea is set to emerge as a fast-growing alternative fuel because of stricter rules on Sulphur content that take effect in January 2020, the report showed. Yet while it seems we have abundant supply; it may be tighter than people think. Recent big Energy Information Administration (EIA) increases in crude inventory to the tune of 28 million barrels may be mainly condensate. If that is the case, it is unlikely to be refined without mixing it with heavier blends of oil like oil from Venezuela. Oh, wait we are getting no oil from Venezuela.

The Summer that wasn’t. No signs of real summer weather are causing a glut of natural gas. Power generation is below normal as air conditioners remain idle. Still the EIA reported that working gas in storage was 2,088 Bcf as of Friday, June 7, 2019, according to EIA estimates. This represents a net increase of 102 Bcf from the previous week. Stocks were 189 Bcf higher than last year at this time, and 230 Bcf below the five-year average of 2,318 Bcf. At 2,088 Bcf, total working gas is within the five-year historical range.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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