Recession Fear Recedes, Crude Supply Fears Accelerate

08/19/2019 1:05 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

With the market recovering from the yield curve scare, which is more about EU weakness, Middle East conflicts and U.S. demand is pushing crude higher, reports Phil Flynn.

Wake me up when the recession is over. Wait, did I sleep through it? What happened to the inverted yield curve fears and all the recession talk? The stock market is coming back and maybe, just maybe, fears of a recession may be off a bit because of record low unemployment and the fact that the yield curve inversion is being driven by U.S. economic strength rather than weakness. 

With negative rates and dimming economic prospects overseas, the rush to park money in the United States says more about concerns in Europe and Asia. Yes, the trade war may be taking its toll, but you also have Brexit as well as bad economic policies in the EU that may be exasperating the slowdown. Oil demand that is at record highs in the States are more questioning of the recession talk and might start pricing in a shortage. U.S. futures are in contango, signaling a tight market.

At the same time geopolitical risk is still out there. The Wall Street Journal reported that Yemen’s Houthi rebels struck Saudi Arabia’s Shaybah oil field, one of the kingdom’s largest, Saudi officials and the Houthis said, deepening tensions between Iran and its rivals that have engulfed the region’s energy facilities. The Houthis said in a statement Saturday that they had targeted Shaybah with 10 drones. The Iran-aligned rebels said the attack was their largest of its kind on Saudi Arabia, which they have been fighting for control in Yemen since 2014.

The Saudi oil ministry confirmed what it called a terrorist attack on Shaybah, which is owned by Saudi Arabian Oil Co., or Aramco, and holds about 14 billion barrels of oil reserves. A military spokesman for the Saudi-led coalition in Yemen didn’t respond to a request for comment. In a statement, Aramco said it had controlled a fire at a natural gas production facility at Shaybah. The company said there were no injuries and no disruption to the field’s production of about 1 million barrels a day. A Saudi oil official and an Aramco executive said the Houthis were exaggerating its size. Saudi energy minister Khalid al-Falih said “the attack was part of a series launched against the kingdom’s oil infrastructure, including sabotaged oil vessels in the Gulf of Oman and damaged pipelines.”

Yet there are those that insist that the sky is falling. Even OPEC. Reuters reports that OPEC delivered a downbeat oil market outlook for the rest of 2019 on Friday as economic growth slows, and highlighted challenges in 2020 as rivals pump more, building a case to keep up an OPEC-led pact to curb supply. In a monthly report, OPEC cut its forecast for global oil demand growth in 2019 by 40,000 barrels-per-day to 1.10 million and indicated the market will be in slight surplus in 2020.

The bearish outlook due to slowing economies amid the U.S.-China trade dispute and Brexit could press the case for OPEC and allies including Russia to maintain a policy of cutting output to support prices. Already, a Saudi official has hinted at further steps to support the market. “While the outlook for market fundamentals seems somewhat bearish for the rest of the year, given softening economic growth, ongoing global trade issues and slowing oil demand growth, it remains critical to closely monitor the supply/demand balance and assist market stability in the months ahead,” OPEC said in the report.

It is rare for OPEC to give a bearish forward view on the market outlook and ICE Brent Crude pared an earlier gain after it was released, to trade below $59 per barrel. Despite the OPEC-led cut, oil has tumbled from April’s 2019 peak above $75 pressured by trade concerns and an economic slowdown.

Gas prices should uptick ahead of the Labor Day weekend. AAA confirms what we have been saying about demand. AAA says: “New data from the Energy Information Administration (EIA) reveals demand for gasoline hit a new all-time high record at 9.93 million barrels-per-day for the week ending Aug. 9. From the previous week, demand grew by nearly 300,000 barrels-per-day to hit the highest level recorded by EIA since it began recording the data in 1991. In comparison to last year at this time, the latest demand rate is approximately 400,000 higher. The high demand level contributed to total domestic stocks falling by 1.4 million barrels to 233.8 million. If demand increases amid falling stock levels in the week ahead, American motorists could see pump prices increase moderately ahead of Labor Day.”

We are looking for a nice little rally this week. Inventories of oil should fall by about 3 million barrels. Gas demand should be strong as well as we head towards the holiday.

Read Phil’s energy report at Price Futures Group.  Twitter: @energyphilflynn   |  Facebook: Phil Flynn

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