The Energy Report 11/6/18
Avoid A Shock
The hard reality to the imposing of total sanctions on Iranian oil was the fact that there was not enough oil in the global market to replace it. President Donald Trump says he was concerned about rising oil prices and the possibility that a total ban on Iranian oil could cause the global economy damage. While the President told reporters that these are the “toughest sanctions ever imposed” but “we want to go a little bit slower” to avoid causing global oil prices to spike. “I could get the Iran oil down to zero immediately, but it would cause a shock to the market,” the President said. “I don’t want to lift oil prices. And if you notice, oil prices are going down very substantially, even though already half of their capacity is gone.” The shock to many was that there was not enough oil in the market to replace all the lost Iranian barrels.
The President is right. Prices are going down and he has had a lot to do with that. Not only did he use his influence to get Saudi Arabia and other OPEC members to raise production, he also has been consistent in releasing oil from the Strategic Petroleum Reserve (SPR). He also has encouraged U.S. oil production by removing many regulations and allowing the U.S. energy industry to do what they do best. In fact, the massive selloff in oil, that we have seen in large part, can be credited to President Donald Trump. Trump knew that high oil prices going into a Midterm election was not the best thing for Republican’s trying to hang onto the house.
So, instead of rising gasoline prices as voters drove to the poll, we have seen lower prices. Gas Buddy reported that “For the fourth straight week, gas prices have continued to fall: the national average price for a gallon of gasoline is down 7.0 cents per gallon over the last week to $2.73 per gallon, the lowest level in over 200 days, according to GasBuddy data compiled from more than 10 million individual price reports. The national average price of diesel saw modest relief as well, falling 1.4 cents to an average of $3.27 per gallon.”
Yet, can the good times last? President Trump has pulled out all the stops to try to lower prices even as going as far as allowing waivers on oil sanctions, but now the market will have to face an even tighter oil market this winter.
The break in oil price will spark demand and the pullback in price will hamper future shale oil output. OPEC will have to think twice about flooding the market and causing an oil price crash. In fact, there is data that is showing that Saudi Arabia is already reversing course and lowering oil output. Excess oil in floating storage continues to trend lower. Besides, after the Mid-Terms there will be less pressure to keep prices cheap. White House national security adviser John Bolton on Monday warned that there are even more Iran sanctions planned, saying the Trump administration is not “simply going to be content” with the level that existed under former President Obama.
While some countries may want to, but Iranian oil might be hard to pay them for it. Reuters reported that the European Union has so far failed to find a country to host a special mechanism to trade with Iran and beat newly imposed U.S. sanctions, three diplomats said, as governments fear being targeted by U.S. counter measures. the European Union had hoped to ready its SPV, which is designed to circumvent the U.S. sanctions, by Monday’s sanctions announcement by the United States. However, no EU country has so far volunteered to host the entity, the EU diplomats said. Several states have been asked by EU foreign policy chief Federica Mogherini to consider being the headquarters, as the bloc tries to uphold the arms control accord, which U.S. President Donald Trump withdrew from in May. While the European Commission declined to comment on Monday, European Economic Affairs Commissioner Pierre Moscovici said “the European Union does not approve of” the imposition of U.S. sanctions lifted under the 2015 nuclear deal.
While oil is probably close to the bottom, short term supply data is weighing on price. Genscape, the private forecaster, reported that supply in Cushing Oklahoma continue to build. Reportedly they showed that supply increased by 2,046,402 from last Friday and by 758,093 barrels since Tuesday. That is raising concerns about another crude oil supply increase this week. Yet, really it is going to be close as we see another uptick in refinery runs and another stellar week of global demand.
While the selloff in oil has been crazy, we will still see oil rebound big in the next 2 months. With distillate supply is tight and winter weather coming early, we will see the stress in supply once again. In the coming weeks we will start to see big drawdowns in U.S. crude supply and another upward surge in demand. Use weakness to put on long term bullish strategies and buy some calls. Yes, we still see $84 this year and a v shaped recovery, still the selloff is testing us. There has been a lot of smoke and some mirrors to extend the selling but if the barrels are not there they just are not there.
Natural gas still getting a boost on weather. Bracket the market with puts and calls. With the potential for record demand, record production, record exports, and inventories at the lowest level going into winter since 2005, it is going to be a wild ride!
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network