Iran, China, Venezuela and Mother Nature are Adding to Crude Volatility

07/17/2019 12:18 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

There are a number of fundamental, supply related and geopolitical factors weighing on the crude oil market, reports Phil Flynn.

The crude oil market was supposed to take its cue from Fed Chairman Jerome Powell yesterday but was upstaged by President Trump and Secretary of State Mike Pompeo. Oil prices that were a little higher plunged after President Trump said that a trade deal with China was a long way off, but we were making progress with Iran. Progress with Iran. We went from the United States having planes in the air ready to attack Iranian targets to making good progress with Iran. Secretary of State Mike Pompeo scared some Iranian risk premium off by saying that Iran was willing to discuss and negotiate its missile program, something that was not part of the original Iranian nuclear deal.

Those comments were later denied by Iran, but the state of U.S.-Iranian relations have gone back and forth wildly over the last few days. Word of back channel talks in an effort to avoid a war was offset by harsh rhetoric from Iran's Ayatollah Ali Khamenei who vowed retaliation against the UK for the “piracy of one of its oil tankers and declared on Tuesday Iran will keep rolling back its commitments to the 2015 Iranian nuclear deal.”

There was the issue with a lost UAE oil tanker named the MT Riah, that the U.S. suspects was seized by Iran, but that Iran says it was just offering aid for a technical glitch. How nice of them.
Regardless, the mixed messages surrounding Iran are going to keep this market flip flopping. We know from recent history that if we start to see the possibility that sanctions on Iranian oil might be reversed, it will be a bearish event. We saw that when President Obama lifted sanctions on Iran and again when President Trump granted waivers to buyers of Iranian crude. Even though it might not happen overnight, if Iranian sanctions get lifted, it will be bearish. It would in effect wipeout OPEC and Russia’s production cut.  It would be even more bearish if the U.S.-China Trade war continues. While I do not believe that the trade war is going to hurt oil demand as much as some people fear, it would still be a negative, especially if you dump another 2 million barrels a day of Iranian oil back on the market.

On the other hand, if we don’t lift sanctions on Iranian oil, the market will tighten significantly in the next few months. Are we having fun yet?

U.S. oil exporters continue to gain from the turmoil except when exports are slowed by Tropical storms. Bloomberg news says, “American crude is grabbing a bigger slice of Asia as U.S. sanctions crimp supply from Venezuela and Iran, and flaring tensions in the Persian Gulf after tanker attacks and vessel seizures are adding further uncertainty for buyers in the world’s largest oil-consuming region. While some nations are seeking to beef up protection for ships navigating the Arabic Gulf and Strait of Hormuz, SK said the actual impact on energy flows has been minimal so far.”

Today, the oil market should take its cue from the Energy Information Administration (EIA) status report. The American Petroleum Institute’s version shows that Tropical Storm Barry had a big impact on distillate demand and exports. API reported a massive 6.226-million-barrel build in weekly supply. This offset a very bullish 1.115-million-barrel crude draw in Cushing Oklahoma and a somewhat shy of expectations crude draw of 1.4 million barrels. The API also reported a modest gas draw of 476,000 barrels.

The problem we are going to have with petroleum data for the next few weeks is the fact that the data is going to be skewered because of Tropical Storm Barry. That will overshadow the fact that we were on track for very big crude draws over the next month and a half. In Energy, Mother Nature often gets the final say. 

That is also true for natural Gas. Tropical Storm Barry may cool things off and record natural gas production pressured prices lower, the storm also caused power outages that also weakened demand. Prior to the storm, the average daily rate of liquified natural gas (LNG) exports last month was the highest for any month since EIA began tracking them in 1997.

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