Geopolitical & Weather Risk on the Rise—Is Crude Bottom in for 2019?

07/23/2019 10:14 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Rising tension with Iran and Venezuela is adding risk premia into the oil market while weather risk may challenge supply, reports Phil Flynn.

Geopolitical tensions are as hot as the weather in Europe as the oil market tries to assess the risk of rising tensions with Iran and Venezuela. Tensions are still running high after Iran seized a UK oil tanker in response to what Iran says was an illegal seizure of their own ship. The UK has told ships to avoid the Strait of Hormuz and other tankers are taking that advice, raising insurance costs and threating to blow the top off oil prices.

Yet an uneasy calm seemed to descend on the oil space as the International Energy Agency (IEA) tried to reassure the market that there is plenty of oil in the world. The IEA says they stand ready to act quickly and decisively in the event of a disruption to ensure that global markets remain adequately supplied.

The IEA points out that their member countries, including the United States, hold 1.55 billion barrels of public emergency oil stocks. In addition, 650 million barrels are held by industry under government obligations and can be released as needed. These IEA emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.

Yet, is the market convinced that is a long- term solution to the risk? Both Brent and WTI prices went up by more than 1% on Iranian tensions as Iran went tanker tit for tat. Venezuela lights went off, again, after an ill-fated confrontation with a U.S. jet.

The U.S. is also moving more troops to Saudi Arabia to bases not used since the Persian Gulf Wars of the 1990s, signaling that the United States may be getting ready to act against Iran.

President Trump was asked Monday if the U.S. was leaning towards negotiation or conflict; Trump said I'm okay either way it goes. So, it could go either way and oil traders are saying the same thing. But we are seeing more buying interest coming in. Some of that is geopolitical risk fear but some of it may be from Mexico’s annual big hedge.

Oh Mexico, never short, but they sure like the dough. Reuters is reporting: “trading in crude oil options and futures surged last week as market participants prepared for Mexico’s annual oil hedging program, in which the country buys as much as $1 billion in contracts to protect its oil revenues. Reuters says that it was not clear whether Mexico has started executing the hedge. The Mexican Finance Ministry did not immediately respond to a Reuters request for comment.

It’s not like we have been getting any oil from Venezuela anyway, but tensions again seem to be rising between Venezuela and the United States. When the lights go out in Venezuela one wonders if it is just because of the total failure of the corrupt Venezuelan socialist government or it is because the United States carried out a covert attack in response to the fact that a Venezuelan jet buzzed a U.S. jet on Sunday.

Did the U.S. carryout an "electromagnetic attack" on Venezuela’s power grid? Was it in response the Venezuela’s aggressive actions on Sunday? Or is the Venezuelan government just using that as an excuse to defer the blame from the government’s pilfering of all the country’s energy assets?

Reuters reported that more than half of Venezuela's 23 states lost power on Monday, according to Reuters witnesses and reports on social media, a blackout the government blamed on an "electromagnetic attack.” “Venezuela's national power grid has fallen into disrepair after years of inadequate investment and maintenance, according to the opposition and power experts.”

It is looking like oil is trying to make a major bottom. The market should get help by inventories that may have some bullish surprise supply draws. Technically we are holding above key support and if we hold, oil should retest the $61 per barrel resistance. More importantly, if we hold the recent lows and build off it, it is very possible that oil has set a low that won’t be tested the rest of this year.

Tropical storm threats to demand for natural gas as opposed to supply. Tropical Depression number three looks like it is going to boomerang off Florida’s East Coast and potentially head for North Carolina. Production areas are not at risk but the potential for power outages and demand destruction could be an issue next week as the storm gains strength. If the storm becomes named it will be known as Chantal. Natural gas did get a bounce on the oppressive heat. Europe is getting the heat as well.

Again, I want to thank all of the fine folks I met at Trader Expo Chicago! Let’s all meet up again in August at the MoneyShow San Francisco and make sure to wear a flower in your hair! Make sure you are getting my trade levels and insider tips on all major commodities and indices. Call to sign up at 888-264-5665 or email me at pflynn@pricegroup.com .

Related Articles on COMMODITIES