Oil prices are rising as it is getting upward momentum from both the supply and demand side, writes Phil Flynn, who will be speaking at the Las Vegas MoneyShow May 13-15.
Oil prices are rising as it is getting upward momentum from both the supply and demand side.
The rising possibility of civil war in Libya helped oil breakout higher on Friday, from what had been a market that was searching for direction. The market, already stronger on better than expected global demand, is now getting more concerned that geopolitical events could leave the global market undersupplied. U.S. sanctions on Venezuela and Iran, along with OPEC + Russia production cuts, are taking its toll on supply. More stimuli from China along with talk of progress from both sides in the U.S.-China trade talks, is signaling that we will soon see a spike up in demand. Even the surprise snap back of 15 oil rigs and four natural gas rigs in the Baker Hughes rig count wasn’t enough to calm a market that is solidly trending higher. There are rising risks everywhere you look, and the price of oil is reflecting the possibility of a very tight global oil market.
We warned traders not to take Libya oil production for granted. The situation in the country is tentative at best. The Wall Street Journal reported that “The U.S. military said it pulled a small contingent of American forces from Libya as the country teetered on the brink of full-scale civil war, with fighting continuing around the capital Tripoli.”
The Journal said that “A rogue Libyan military commander, Gen. Khalifa Haftar, ordered his forces to attack Tripoli on Thursday in an offensive against an internationally recognized government based in the capital. The fighting continued over the weekend as both sides launched airstrikes, each making use of the small number of military aircraft in their possession.“
Mr. Haftar’s attack has crushed hopes for a negotiated solution in the near term, sending rival forces scrambling to defend the capital. By Sunday, there was no sign Mr. Haftar’s forces had made significant advances in the Tripoli region, raising fears of a long battle for the capital. This comes just after Libyan oil production reached a six-year high of 1.17 million barrels. Now with this conflict heating up it is just a matter of time before those numbers start to fall.
There are also issues with Iran ahead of President Donald Trump’s decision to consider granting waivers to buyers of Iranian crude. Dow Jones reports that “Top Iranian officials have threatened retaliation against American forces in the Middle East in response to the U.S. plan to designate the Islamic Revolutionary Guard Corps as a terrorist organization, amplifying tensions between countries that have clashed repeatedly over the Islamic Republic's footprint in the region. The Trump administration is expected to make the declaration on Monday in an effort to squeeze the IRGC's financial resources and shrink its military presence in the Middle East. On Sunday, Iranian officials shot back at those plans. “
Iranian Foreign Minister Javad Zarif said “The Trump administration fully understands that such a move would lead to a disaster for U.S. forces in the Middle East. He said it was intended to benefit Israeli Prime Minister Benjamin Netanyahu, who enjoys strong support from the Trump administration.” Mr. Zarif also appeared to allude to the extended.
U.S.-China trade talks seem to be making progress, but China is taking no chances by adding more stimuli to its system. Reuters reported that in a document published on the central government’s website late on Sunday,” Beijing said it would step up a policy of targeted cuts to banks’ required reserve ratios to encourage financing for small and medium-sized businesses.”
This latest stimulus comes as Chinese oil demand remains near all- time highs. In fact, if you look around the globe all major central banks are in an accommodative mode which will increase economic activity and keep oil demand strong. Oil is waking up to the fact that the global oil demand crash and the so -called recession never happened.
That is why we have been warning users to be hedged. The upside risks are abounding. Even former bearish funds are calling for higher prices. While we must be cautious, oil looks to have a lot of upside risk going forward. Will OPEC relent and raise output? Not right away. Will shale make up for losses of crude? In part, but not completely.
