Join Phil Flynn LIVE at The MoneyShow Las Vegas!

Join Phil Flynn LIVE at The MoneyShow Las Vegas!


Crude Oil Could Face Supply Crunch

02/12/2019 11:03 am EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The recent crash in the price of oil assumed a lot of economic doom and gloom, but Senior Energy Analyst The PRICE Futures Group Phil Flynn writes, “It is very possible that the oil market might be undersupplied.”

Crude oil prices are bouncing back on hopes that the United States might avoid a government shutdown and rumors of progress on U.S.-China trade talks. White House adviser Kellyanne Conway told Fox News that “This president (Trump) wants a deal. He wants it to be fair to Americans and American workers and American interests.”

There are also reports there is a deal to keep the government open, but with far less money for a wall then President Trump originally wanted. So, if we indeed get resolutions on these thorny issues, crude oil demand will outperform expectations and then oil prices go into crunch time. In other words, if we get a China deal coupled with OPEC cuts and Venezuelan sanctions, we are most likely going to see a supply crunch.   

 The recent crash in the price of oil assumed a lot of economic doom and gloom. If the gloom is not so gloomy, it is very possible that the oil market might be undersupplied.

It is not only me saying this. The CEO of BP, Bob Dudley, warned that oil market uncertainty could lead to a “real crunch”. In an interview with a CNBC reporter he warned that “There's a lot of variables here and there's a lot of things that could lead to a real crunch." Dudley said that "When prices are too high or too low, it leads to all kinds of unintended consequences."

For oil, we have had more than our share of unintended consequences. When President Trump talked about sanctions on Iran, it caused prices to go too high too fast. When he tweeted about OPEC, he caused them to break too fast. When OPEC and U.S. producers ramped up production to offset the lost Iranian barrels, it had consequences. When President Trump granted waivers to Iran’s biggest buyers, it had consequences.

The break in price forced drillers to cut back on rigs. It caused oil companies to cut back on investment and now OPEC is determined to remove any hint of excess supply.

Now with refiners scrambling to replace the heavy sour oil from Venezuela, we are seeing gas crack spreads start to improve showing the first signs that we may see tighter gasoline supplies once we get back to the summer driving season. Diesel prices are at big risk as well, especially if the refiners can’t find enough heavy crude.

Refining maintenance season is ahead but soon crunch time will set in. When it does, we will see a big rally in oil and products. U.S. demand is near record highs and U.S. consumers feeling more confident about their prospects than they have in a long time bodes well for demand.

Venezuelan President Nicolas Maduro is still acting like he is staying around in Venezuela. Reuters is reporting that “Foreign partners of Venezuela's PDVSA are facing pressure from the state-run oil firm to publicly declare whether they will continue as minority stakeholders in Orinoco Belt projects following U.S. sanctions.”

 The sanctions on Petroleos de Venezuela (PDVSA), imposed last month in an attempt to dislodge Maduro, barred access to U.S. financial networks and oil supplies for the PDVSA joint ventures, pressuring Venezuela's already falling crude output and exports. PDVSA has been in talks with the companies to persuade them to commit publicly to the joint ventures, the sources said in recent days. France's Total SA (TOT), Norway's Equinor ASA (EQNR), Russia's Rosneft and U.S.-based Chevron (CVX) hold minority stakes in joint ventures with PDVSA that produce crude and operate oil upgraders capable of converting Venezuela's extra-heavy oil into exportable grades. PDVSA did not reply to a request for comment.

On Monday, Venezuelan Oil Minister and PDVSA head Manuel Quevedo on a visit to India said that relations with international oil companies including Chevron were continuing. A manager at Rosneft said last week that the company did not expect oil output to decline at its projects in Venezuela this year, adding that the company saw the current

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on ENERGY

Keyword Image
Love Is Crude Oil
02/14/2019 11:30 am EST

Crude oil prices are finding support despite bearish supply figures thanks to optimism over US-China...

Keyword Image
Trade Wars & Shutdowns
02/11/2019 9:53 am EST

Trade wars and government shut downs weigh on crude oil prices as we head into shoulder season., wri...