Supply/demand & Geopolitics are Playing Tug-of-War on Crude Fundamentals

08/27/2019 12:43 pm EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

There are numerous fundamental factors pushing and pulling the crude oil market, reports Phil Flynn.

Crude oil prices are getting bounced around on conflicting reports about late night Chinese phone calls and the possibility of talks with Iran.

The crude oil market initially rallied on trade war truce hopes as President Trump doubled down on his belief that China was ready to talk. In a news conference with French President Emmanuel Macron he said that, “I think they want to make a deal very badly. I think that was elevated last night. The vice chairman of China came out, he said he wants to see a deal made.” 

Yet oil sold off because in the same news conference, in a peace effort by President Macron who invited Iranian Foreign Minister Mohammad Javad Zarif, President Donald Trump said he could meet with Iranian President Hassan Rouhani within weeks, “If the circumstances were correct, were right, I would certainly agree to that.”

Iranian President Rouhani said Iran was always ready to hold talks. "But first the U.S. should act by lifting all illegal, unjust and unfair sanctions imposed on Iran," he said in a speech broadcast live on state TV. "Washington has the key for positive change ... So, take the first step ... Without this step, this lock will not be unlocked," Rouhani said. “If someone intends to make it as just a photo op with Rouhani, that is not possible, it’s possible to do it with Photoshop.” He knows Photoshop can do it because that is how they used to make it look like they shot off more missiles than they really did.

Oil traders know that a deal with Iran will be bearish. And no deal, will be bullish. Because while all this trade war and Iran tension thing is going on, global oil inventories are falling. OPEC expects they will fall more and are committed to make that happen. U.S. oil producers are struggling and decline rates on shale wells are accelerating. The Energy Information Administration based on their own drilling productivity data, will once again have to downgrade their outlook for U.S. oil production. This week we should see U.S. supply fall again as robust U.S. demand and falling OPEC production should cause a big oil supply drawdown. Private oil intelligence services are reporting that supply in the Cushing, Oklahoma delivery hub has fallen almost 2.5 million barrels from last week.

Gulf Coast inventories should also fall as U.S. exports will rise and imports should fall. We could see big declines in U.S. supply in the next few weeks. Iran still remains the biggest threat to the bull case as a lifting of sanctions could unleash millions of barrels of supply overnight.

The Wall Street Journal though says that the U.S. is pressuring Iraq to get off its dependence on Iranian oil and gas. The Wall Street Journal reported: “Iraq is trying to cut its dependence on Iranian energy under pressure from the U.S., moving to connect its power grid to Tehran’s Arab rivals and develop alternatives to Iranian natural-gas imports. American officials, who are trying to isolate Tehran diplomatically and economically, have long criticized Iraq’s deep energy relationship with Iran. The U.S., however, has given Iraq a rare exemption from sanctions, largely because much of the country would plunge into darkness without Tehran’s energy but also because Baghdad has promised to break its Iranian habit.” 

Between 30% and 40% of Iraq’s power supply is derived from Iranian electricity and natural gas, with electricity imports accounting for roughly a quarter of that total. Now, Iraqi officials say they have made progress on cutting back. In the past nine months, Iraq has boosted its own power generation by around 3.5 gigawatts, enough to light up almost two million homes. Baghdad has also fast-tracked agreements that will enable Iraq to begin to replace Iranian energy by importing electricity from Gulf Cooperation Council countries like Saudi Arabia via Kuwait within 10 to 12 months.”

Natural gas popped on West Coast heat. Still this can be a false rally. Buy puts.

We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn
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