The Energy Report for Tuesday, August 20, 2019

Tanker Rancor

The U.S. is still upset about Gibraltar and the Iran-flagged Adrian Darya 1, that was previously named Grace 1, and has warned Greece not to assist the tanker with 130 million dollars of crude. According to the Wall Street Journal the U.S. State Department is threatening companies and mariners of immigration that they could face potential criminal consequences for assisting the tanker. Iran is not happy about the threat and Iran’s Revolutionary Guard is warning that they will respond firmly to any U.S. move against the Adrian Darya. Iran is still holding the British-flagged tanker, the Stena Impero, which they seized in an act of retaliation. This comes after Iranian backed Houthi rebels attacked Saudi Arabia’s Shaybah oil field with 10 drones as Iran lashes out as the world shuns their oil. Even China, that is storing many barrels of Iranian oil, is afraid to buy it out of concern that the U.S. will crackdown on them with more sanctions and criminal charges.

All of this comes as the September crude futures expires as the market tries to guess whether we are headed for a recession or if we will see an oil demand surge because of more shots of global economic stimulus. China is reacting by looking to lower interest rates to make it easier to borrow money. That way they can try to stimulate the economy the same way the U.S. does. President Trump is calling for a one full basis point rate cut but Federal Reserve Bank of Boston President Eric Rosengren and a Fed hawk says that further interest-rate cuts are not needed.

With all this back and forth, oil is stuck in a big trading range. A range we expect will eventually lead to an upside breakout. We believe that because U.S. oil demand is near record highs, crude supply will fall below the average range in just a few weeks and that U.S. crude production numbers are too optimistic and weak demand projections are too pessimistic.

In the meantime, there is talk that the Trump Administration wants to quarantine Venezuela and China is afraid to buy Venezuelan oil as well. Reuters reports that, “China National Petroleum Corp, a leading buyer of Venezuelan oil, has halted August loadings following the latest set of U.S. sanctions on the South American exporter, two Beijing-based senior sources with direct knowledge of the matter told Reuters on Monday. The Trump administration in early August froze all Venezuelan government assets in the United States and U.S. officials ratcheted up threats against companies that do business with Venezuela. “Trump’s executive order gave a directive for the follow-up sanction measures that shall be announced by the U.S. Treasury… CNPC is worried that the company is likely to be hit by the secondary sanctions,” said one source. A CNPC spokesman declined comment. The White House imposed sanctions on Venezuela’s oil industry in January in an effort to unseat socialist President Nicolas Maduro, whose re-election in 2018 is viewed by much of the Western Hemisphere as illegitimate.”

Gas prices may rise, and reports of big EU gas imports are making the rounds. The arb window, while not as spectacular as it once was, is attracting barrels of gas. U.S. gasoline demand is shattering records as the U.S. consumer shows no real sign of slowing down.

How hot does it have to get for natural gas? Natural gas has had its best chance to rally and so far, the move is not impressive. Use strength to buy some puts. Better act now before the LNG revolution changes the natural gas landscape in a couple of years. The Energy Information Administration (EIA) reported that Natural gas deliveries to U.S. facilities producing liquefied natural gas (LNG) for export set a monthly record in July 2019, averaging 6.0 billion cubic feet per day (Bcf/d)—7% of the total U.S. dry natural gas production—according to data from OPIS PointLogic Energy. In the first seven months of 2019, natural gas feedstock deliveries to LNG export facilities have been the fastest growing among all U.S. natural gas consumption sectors. Natural gas delivered by pipelines to Mexico and to U.S. LNG export facilities reached 10.9 Bcf/d in July and averaged 10.0 Bcf/d in the first seven months of this year, 30% more than in the same period of 2018. The United States has been exporting more natural gas than it imports on an annual basis since 2017, and EIA expects that U.S. natural gas exports will continue to increase as new LNG facilities come online. EIA estimates that U.S. LNG exports set new records in June and July 2019 at 4.8 Bcf/d and 5.2 Bcf/d, respectively, based on tanker loadings data from Bloomberg L.P. Natural gas feedstock deliveries to LNG export terminals averaged 5.5 Bcf/d in June and 6.0 Bcf/d in July, implying that about 15% of the natural gas feedstock to LNG facilities was used as fuel in the liquefaction process.

LNG exports are the next big thing. Naureen S. Malik of Bloomberg writes that the U.S. just opened its sixth export terminal. “Freeport LNG Development LP produced liquefied natural gas for the first time at its $15 billion export terminal in southeast Texas, becoming the sixth such plant to operate in the U.S. as the country expands international shipments. The Quintana Island-based facility is on track to load its debut cargo later this month and begin commercial operations in September, the company said in an emailed statement. The U.S. has emerged in the past three years as the third- largest supplier of LNG, after Australia and Qatar. It will become the biggest by 2025, according to Morgan Stanley, with about a dozen more projects vying to liquefy shale gas supplies and ship it overseas. The global LNG market is seen expanding 50% by then.”

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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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