The Energy Report 09/28/18
Another Brick in The Wall
The walls are closing in on the oil bears. Underestimations of current oil demand, as well as overestimation of shale oil production potential, has left the oil market short of supply. While oil bears hope that estimations of lower economic growth going forward will slow demand, the reality is that it will continue to grow. The GDP came in at 4.2%, a number that reflects what we have seen in record U.S. refinery demand. The bears look to a widening trade deficit that expanded for the third month in a row, climbing to $75.8 billion from $72 billion in July. They think that the gap will cool growth and that along with the Trump Trade War will slow oil growth down to a trickle.
Yet, the naysayers on U.S. and global demand have dangerously underestimated demand and those underestimations have helped put us in the precarious situation that the oil market is now in. Talk of lower for longer and the pullback in investment has sold the global economy short. Now as we face a showdown with the Iranian regime the ability to replace those lost barrels of oil leaves the global economy in a vulnerable state.
Brent Crude is still leading the way as record U.S. oil production is helping us stay more balanced then the undersupplied Euro and Middle Eastern markets. You can try to tweet more oil out of OPEC but for every barrel the increase output it is one less barrel of spare production capacity. Bloomberg News reports that OPEC’s current spare capacity is relatively thin. The U.S. Energy Information Administration puts it at just 1.4 million barrels a day and estimates that it will drop to 1.2 million by late 2019, one of the lowest levels on record, and like 2008 when oil prices zoomed to $150 a barrel.
We can talk about Iranian sanctions and we can talk about the utter failure of the Venezuelan socialist state, yet it really has been the U.S. economic growth story and a GDP that they said could not happen that has propelled this market higher. Now with Iranian sanctions and with conventional oil sources failing to grow to meet demand the market needs to move higher to meet our moderate oil demand.
Gas and diesel prices are also on the rise and hopefully your hedges are in place. We could see those prices start to surge when cold weather starts to set in. On the retail front there is talk that gasoline could hit $4.00 a gallon in California. As far as Nat gas is concerned, when is enough going to be enough? Nat gas soared not only on above normal temperature forecast but also a very bullish EIA report. They reported that working gas in storage was 2,768 Bcf as of Friday, September 21, 2018, according to EIA estimates. This represents a net increase of 46 Bcf from the previous week. Stocks were 690 Bcf less than last year currently and 621 Bcf below the five-year average of 3,389 Bcf. At 2,768 Bcf, total working gas is below the five-year historical range.
Still if you like to pick a top, I feel that despite the short-term bullish fundamentals a top is near. Look to buy puts as record Nat gas production should cool this red-hot market.
Just a short note on yesterday’s Senate hearings. It was a sad day for this country to see the rights of the of the accused and the accuser taken away for the pursuit of political gain. They stole the rights of privacy from the accuser, by leaking her story, so they could use her obvious emotional and mental pain for cold hearted political gain. They took away the accused presumption of innocence and declared him guilty without any evidence or corroborating witnesses. They then used a Soviet style or Nazi style line of questioning, that if you don’t call for an investigation on yourself, then you surely must be guilty. For a country that says it is the land of the free and wants to be a beacon of human rights for the rest of the world, this was a travesty It was also very dangerous for every American. If they can take away their rights, it’s only a matter of time before they take away yours.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network