Fighting in Libya, incompetence in Venezuela and a U.S. decision on Iranian sanctions relief are key drivers as global crude supply is challenged, writes Phil Flynn. See him speak at the Las Vegas MoneyShow.
As the fighting in Libya intensifies, it is clear that global oil markets are not taking this lightly. One reason is because Libya produces a very light sweet crude. If Libyan oil comes off the market the world will look to the U.S. shale oil producer to fill that void and that was expressed very clearly in the West Texas Intermediate (WTI) contract versus Brent. While the world is awash in light oil relative to heavier grades for now, from a light oil production standpoint the United States would be the only game in town. Crudes that have an API gravity above 35 degrees are categorized as “light”, while those with API gravity between 25 and 35 degrees are “medium” and below 25 degrees, “heavy”.
We saw that WTI/Brent spread widen even more with reports like those from Reuters that said a Libya warplane attacked Tripoli’s only functioning airport on Monday with eastern forces advancing on the Libyan capital, disregarding international appeals for a truce in the latest of a cycle of warfare since Muammar Gaddafi’s fall in 2011. The report said casualties were mounting in fighting that also threatens to disrupt oil supplies, fuel migration to Europe and wreck U.N. plans for an election to end rivalries between parallel administrations in the country’s east and west.
The situation in Libya, along with other hotspots, is seeing those risk factors being priced in many oil spreads. The spreads that have been on fire has been long on the front end and short on the backend, as we have mentioned before. The market is pricing in a potential tight market as Venezuelan oil production plummets to an estimated 600,000 barrels a day, which is a historic low. Power outages, protests and the lack of anyone at the Venezuelan oil company that actually knows what they are doing are accelerating the production plunge. That drop-in supply is going to boost U.S. oil prices as a potential squeeze play might be on, when refiners start coming back out of maintenance.
This all is in addition to the increasing risk that the Trump Administration will not grant waivers to Iranian oil buyers after declaring the Iranian Revolutionary Guard a terrorist organization yesterday. Oil rallied after the official announcement. Oil may already be getting the market ready for the fact that this declaration will lead to a further tightening of global oil supply.
Reuters is reporting that Indian refiners are holding back from ordering Iranian oil for loading in May, pending clarity on whether Washington will extend a waiver from U.S. sanctions against the OPEC-member, four sources said. That lack of buying oil will cause India to look to other sources for oil. If the Trump Administration does grant waivers, it will cause an oil price correction. It won’t be as dramatic as the last one because, this time, no one is really taking steps to offset the loss of those Iranian barrels. Instead of raising output OPEC is cutting output. U.S. producers are not in a hurry to try to raise output or spread pipelines like they were the last time we faced a deadline on getting Iranian oil exports to zero.
Besides, many in the Trump administration are pushing for maximum pressure on Iran to push them into a nuclear agreement that will include their pursuit of ballistic missiles and an agreement to stop meddling in the affairs of other countries. And Iranian oil in many cases is light medium sour crude, so shale oil cannot act as a replacement on its own. Most refineries worldwide are made to run crudes with an API of 32.
The market is pricing a very tight market as oil demand is coming in stronger than expected and supplies are suspect. Yet at the same time the market must be wary of this week’s oil inventories. Oil inventories, in recent weeks, have been totally thrown out of whack due to the many issues in the Houston Shipping Channel. Closures due to weather and a chemical fire at a plant will make it almost impossible to gauge the numbers. Having said that we should see about a two million barrel increase in crude supply and a drop of about 2.5 million barrels on the product side.
Still we see upside risk in oil products and we still need to be hedged. Demand season is going to kick into high gear. USA TODAY reports that prices at the gas pump are rising as maintenance work at refineries is squeezing supply. Drivers in the West Coast, Rockies, Great Lakes and Central regions are feeling the pinch the most, while motorists east of the Mississippi River are seeing more moderate increases. The national gas price average increased 5¢ to $2.74 a gallon this week and is eight cents more than the same time last year, according to data from AAA. The rate is 28¢ higher versus a month ago. Refinery maintenance – both planned and unexpected – is largely to blame. Overall refinery utilization is 86%, compared with 93% a year ago.
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