Rising geopolitical risk and falling supply due to sanctions and a storm in the Gulf is adding pressure on crude prices, reports Phil Flynn.
Crude oil prices continue to rise after the British Royal Navy frigate, HMS Montrose, shut down an attempt by three Iranian vessels to commandeer a BP PLC -run tanker British Heritage and U.S. oil production and transit in the Gulf of Mexico is getting shut down by tropical cyclone 2 that will soon turn into tropical storm Barry.
Oil also got support from another big draw in oil Inventory from the Energy Information Administration (EIA) and from Fed Chairman Jerome Powell’s testimony that assured the market that interest rate cuts are coming. Risk continues to rise as supply continues to fall and demand expectations helped by a dovish Fed should continue to rise.
Iran’s attempt to block passage of a U.K.-flagged commercial vessel through the Persian Gulf, ended with HMS Montrose turning its guns on the boats from the Iranian Revolutionary Guard. Probably a wise move by Iran to backdown at that point. The move was in response to the UK seizing an Iranian tanker that was accused of violating international sanctions against Libya. In fact, just days ago a former senior commander with Iran's Revolutionary Guard Corps said it would be Iran’s "duty" to seize a British oil tanker if the Iranian tanker being held by the UK was not released. Yet the failed attempt shows the increasing desperation and recklessness of the sanctioned Iranian regime.
The Trump Administration has already signaled that there will be more sanctions and says that Iran has been cheating on the deal they made with Europe and the United States all along when it came to uranium enrichment. The U.S. also says that Iran’s breach of agreed upon uranium enrichment in the 2015 deal levels is "crude and transparent attempt to extort payments from the international community. If Iran continues to lash out like this the risk of premium for oil will only go higher.”
Storm Brewing
Storm surge worries are centered on New Orleans as the potential of Tropical Storm Barry to test the levies in that town are high. Oil is already seeing the impact. The Bureau of Safety and Environmental Enforcement (BSEE) reported that as of 11:30 central time yesterday “From operator reports, BSEE estimates that approximately 31.89% of the current oil production in the Gulf of Mexico has been shut-in, which equates to 602,715 barrels of oil per day. It is also estimated that approximately 17.85% of the natural gas production, or 496.2 million cubic feet per day in the Gulf of Mexico has been shut in.
The BSEE also says that personnel have been evacuated from four rigs, equivalent to 19.05% of the 21 rigs of this type currently operating in the Gulf.
Forgetting all that other drama, the EIA Report was bullish. They reported that crude oil inventories plunged by 9.5 million barrels from the previous week. That draw means U.S crude stocks have fallen 26.5 million barrels reversing previous EIA upward adjustments. The more bullish part about this report is a lot of market talk that some of the oil in inventory is just line fill for new oil pipelines that keeps pipelines running and are not really usable supply. That means oil traders may have a false sense of security when they look at the big picture and don’t look behind the data.
The EIA said that total motor gasoline inventories fell by 1.5 million barrels last week and distillates increased by 3.7 million barrels last week and are about 5% below the five-year average. Total commercial petroleum inventories decreased last week by 3.8 million barrels last week.
Demand
U.S. demand continues to be strong as total products supplied over the last four-week period averaged 20.9 million barrels per day, up by 2.5% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.7 million barrels per day, up by 1.2% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels per day over the past four weeks, up by 0.3% from the same period last year. Jet fuel product supplied was down 3.9% compared with the same four-week period last year, according to EIA.
Oh sure Jerome Powell moved the markets with his dovish stance on rates but it was Alexandria Ocasio-Cortez who was the real star when she asked about the contradiction in the Phillips Curve and why the Fed overestimated what full employment was and why the inflation relationship is becoming increasingly decoupled over time. The Fed Chairman seemed genuinely pleased with the question and gushed the answer.
Nat gas still on the attack
The EIA is predicting record demand and record production in its Short-Term Energy Outlook. They also wrote: “EIA expects the share of U.S. total utility-scale electricity generation from natural gas-fired power plants will rise from 35% in 2018 to 38% in 2019 and then decline slightly in 2020. EIA forecasts that the share of U.S. generation from coal will average 24% in 2019 and 23% in 2020, down from 27% in 2018. The forecast nuclear share of U.S. generation falls from 20% in 2019 to 19% in 2020, reflecting the retirement of reactors at five nuclear plants in 2019 and 2020. Hydropower averages a 7% share of total U.S. generation in the forecast for 2019 and 2020, similar to 2018. Wind, solar, and other no hydropower renewables together provided 10% of U.S. total utility-scale generation in 2018. EIA expects they will provide 11% in 2019 and 13% in 2020.
