Iran Trumps Inventory

09/12/2019 10:30 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Reports that President Trump was prepared to lift sanctions on Iran to get them back to the nuclear negotiations roiled oil markets, reports Phil Flynn.

Oil prices reversed course even after a very bullish oil inventory number as the market is now adjusting to the potential return of Iran to the global oil market. This comes as the United States is back as the world's largest oil exporter, according to data from the International Energy Agency.

OPEC plus Russia meets today at the World Energy meeting in Abu Dhabi for a ministerial monitoring committee meeting. The challenges for OPEC are now more daunting as the cartel and its playing hard to get counter partner Russia is now having to face the reality that stored Iranian oil could flood the market. In fact oil had a major reversal after it became clear that the real reason national security advisor John Bolton left was because President Trump considered the lifting of sanctions on Iran to get them to come back to the nuclear negation table.

Oil sold off even harder after it was reported that a phone call between Iranian President Hassan Rouhani and French President Emmanuel Macron to discuss the Iranian nuclear deal happened. President Macron has been acting as a go between with Iran and the U.S. and while President Rouhani reportedly said that Iran would not negotiate as long as there were sanctions in place, it appears that President Trump is willing to risk that.

That presents bigger challenges for Saudi Arabia and its new oil minister and member of the royal family Prince Abdulaziz bin Salman. Bin Salman knows his main job is to get oil prices much higher so the Saudis can get a big chunk of change for its IPO. Neither President Trump’s softening on Iran, record U.S. exports nor Russia is making that easier. Prince Abdulaziz bin Salman ahead of the meeting said that, “it's important we sustain a high level of negotiation." Good Luck with that. In other words, to cheaters Iraq and Nigeria, and sometimes Russia, comply or die of low oil prices.

Russia may test the seasoned energy minister in his new role, basically because they can. Russia does not need oil prices much higher and to play along, the Russians may want to watch the new Saudi Energy Minister squirm. Russia for their part, put out a report about the possibility of $25 per barrel oil which would be an IPO killer for Saudi Aramco. Russia has the upper hand though. Russian Energy Minister Alexander Novak stressed it was “extremely important” for all members to reach full compliance. Yet hopes for additional cuts at this point are harder because of the news that the U.S. is the number 1 exporter in the world. All of this drama makes the U.S. inventory numbers seem old news. Despite doom and gloom predictions about global demand and record U.S. production, U.S. crude supplies are below average.

There is no oil glut in the U.S. as the Energy Information Administration reported that, "Crude oil supplies fell by 6.9 million barrels from the previous week. At 416.1 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year. Total motor gasoline inventories decreased by 0.7 million barrels last week and are about 3% above the five-year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 2.7 million barrels last week and are about 6% below the five-year average for this time of year." Oil demand rocked as well. The EIA reported that demand based on total products supplied over the last four-week period averaged 21.6 million barrels per day, up by 0.4% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.7 million barrels per day, up by 0.2% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels per day over the past four weeks, down by 2.1% from the same period last year.

Yet the International Energy Agency (IEA) Is warning of a global oil glut. The EIA says that, “The oil market focus recently has been on demand as growth weakens amidst uncertainty around the global economy, and particularly trade.

While the relentless stock builds as we have seen since early 2018 have halted, this is temporary. Soon, the OPEC+ producers will once again see surging non-OPEC oil production with the implied market balance returning to a significant surplus and placing pressure on prices. The challenge of market management remains a daunting one well into 2020.

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