Crude Oil & the Peace Put

07/18/2019 12:06 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Crude oil prices tanked, breaking key support on a report that President Trump is going to send Senator Rand Paul to Iran to talk peace, reports Phil Flynn.

All President Trump is saying is give peace a chance, or maybe Senator Rand Paul a chance. Or maybe peace with Iran is just chancy. Crude oil prices tanked, breaking key support on a report that President Trump is going to send Senator Rand Paul to Iran to talk peace. Oil traders know that this can be a game changer for oil as the potential lifting of sanctions on Iranian oil could tip the balance of the market from being undersupplied to being oversupplied. Yet an admission by Iran that they seized an UAE oil tanker may make talks more difficult.

We know from experience that when there are expectations of Iranian oil coming back to the market, it is very bearish. The original lifting of sanctions by the Obama Administration to the Trump waivers to buyers of Iranian oil caused significant selloffs in oil. Yet it might be a little too early to start counting those barrels.

Fox News reports that Iran has admitted to seizing a foreign tanker with 12 crew members accused of smuggling oil in the Persian Gulf, the country's state TV says: “The seizure comes as tensions mount between the United States and Iran over the unravelling nuclear deal between Tehran and world powers, and days after an oil tanker based in the United Arab Emirates disappeared off trackers in Iranian national waters.” It is not clear whether this admission will stall the Trump/Paul peace talks. Iran had denied that they had seized the tanker yesterday but that was yesterday.

Iran may use this tanker as a bargaining chip in talks, yet Iran still is blaming the United States for all its problems. At first, the Iranian missile program was on the table and now it is apparently off the table.

Bloomberg News reported that Iran says that “The U.S. shot itself in the foot” by pulling out of the nuclear accord with Iran. Foreign Minister Javad Zarif said, offering a grim outlook for the chance of opening talks with President Donald Trump. Zarif, in an interview Wednesday with Bloomberg Television, also accused European countries that are part of the agreement of failing to carry out their own commitments under the 2015 deal and after the U.S. withdrawal. He said, “promises to allow Iran to sell oil and repatriate money have failed to materialize.”

So far, the Trump Administration has reacted with caution on the tanker situation, perhaps hoping that they can get back to talks.

We can also talk about U.S. oil inventories, which was obviously impacted by Tropical Storm Barry. The Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.1 million barrels from the previous week. At 455.9 million barrels, U.S. crude oil inventories are about 4% above the five-year average for this time of year. Total motor gasoline inventories increased by 3.6 million barrels last week and are about 2% above the five-year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories increased by 5.7 million barrels last week and are about 2% below the five-year average for this time of year.

ropane/propylene inventories increased by 0.5 million barrels last week and are about 5% above the five-year average for this time of year. Total commercial petroleum inventories increased last week by 11.7 million barrels last week.

Still despite fears of being oversupplied the EIA is showing that OPEC has problems. The EIA reported that “Unplanned crude oil production outages for OPEC averaged 2.5 million barrels-per-day in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million barrels-per-day) of all OPEC unplanned outages.”

The EIA say that Natural gas prices are set to be the lowest in 20 years. The heat wave is coming but you might not feel it with your electric bills thanks to the U.S. energy industry and fracked natural gas. The EIA forecasts Henry Hub natural gas spot prices for June, July, and August this year will average $2.37 per million British thermal units (MMBtu). If realized, this price would be the lowest summer average Henry Hub natural gas price since 1998. EIA expects Henry Hub natural gas prices will be 55 cents/MMBtu lower, about 19%, than last summer’s average.

In the July short term energy outlook (STEO), EIA revised its forecast for 2019 Henry Hub natural gas prices down from the June STEO following three consecutive months of price declines. Prices in June averaged $2.40 per MMBtu and have declined by 19% since March. Spot prices at key trading hubs across the country have traded close to the Henry Hub basis. Prices at the Transcontinental Pipeline Zone 6 trading point for New York City and the Chicago Citygate were both at $2.12 per MMBtu, the lowest June average price and a decrease of 25% and 23%, respectively, from June 2018. The PG&E Citygate near San Francisco had the highest June average price at $2.59 per MMBtu, a 14% decrease.

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