Energy Markets Face High Risk to Supply

05/16/2019 11:56 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

While recent supply reports have been bearish, energy supply faces huge geopolitical risks, notes Phil Flynn.

The risks are not going away. Oil prices shook off a bearish Energy Information Administration (EIA) supply report to again price in the most significant risk to global oil supply in some time. Tensions remain high as the Unites States ordered all non-essential personnel leave its embassy in Iraq on intelligence that there could be attacks by Iranian-backed Shiite militias.

These threats come after it appears Iran authorized attacks on oil tankers in waters off the United Arab Emirates, and after Iranian backed Houthi rebels claimed to carry out a drone attack on a Saudi oil pipeline. These bold attacks raise concerns that a miscalculation could lead to a conflict. The U.S. last week deployed an aircraft carrier, a bomber task force, and other equipment and personnel, citing unspecified threats. These threats include reports that U.S. intelligence had photographs of missiles on small boats in the Persian Gulf that were put on board by Iranian Islamic Revolutionary Guards.

These missiles could attack U.S. ships as well as other oil tankers that move oil through the Strait of Hormuz, the world's most important chokepoint, with an oil flow of 17 million barrels-per-day in 2015, about 30% of all seaborne-traded crude oil and other liquids during the year. In 2016, total flows through the Strait of Hormuz increased to a record high of 18.5 million barrels-per-day according to EIA and the Bab el-Mandeb.

Closing the Bab el-Mandeb Strait could keep tankers in the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa according to EIA.

The EIA confirmed the crude oil increase that the API reported, but the market shook it off. The EIA showed that crude oil supply increased by 5.4 million barrels from the previous week. At 472.0 million, 2% above the five-year average for this time of year. Yet we need more gasoline so refiners will need to step up. Total motor gasoline inventories decreased by 1.1 million barrels last week and are about 2% below the five-year average for this time of year. Distillate fuel inventories increased by 0.1 million barrels last week and are about 4%. The Market action shows that the market is worried about the bigger long-term supply picture.

U.S. crude oil refinery inputs averaged 16.7 million barrels per day during the week ending May 10, 2019, which was 271,000 barrels per day more than the previous week’s average. Refineries operated at 90.5% of their operable capacity last week. Gasoline production decreased last week, averaging 9.9 million barrels per day. Distillate fuel production increased last week, averaging 5.3 million barrels per day. They still have a lot of work to go.

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