All a sudden the hedge funds love oil again. Hedge funds that in recent weeks abandoned the oil complex as they worried that the resumption of Iranian nuclear talks would bring a flood of oil to the marketplace, says Phil Flynn of the PRICE Futures Group.
Yet last week based on signs that demand in the United States and the world was coming back in a way the hedge funds boosted their net long positions to the highest level in nearly three years. That helps supports the oil market late last week, along with reports that the Biden administration was considering giving in to pressure from refiners to reduce ethanol in gasoline. Reuters had reported that the US EPA was considering ways to provide relief to US cell refiners from biofuel blending mandates as the price of corn has exploded, as well as the price of soybeans. Talk of the waivers caused the grain market to sell off and the oil market to rally as we would use more oil. That about-face by the Biden administration seems to not be in keeping with his green energy cuts, but at the same time he is a political animal, and sometimes politics gets ahead of the planet.
The other major factor that was keeping hedge funds out of the market was the possibility of an Iranian nuclear deal. The Biden administration has been falling all over itself trying to get Iran back to the table for these talks and basically begging them to get back into the ill-fated 2015 agreement. There have been mixed reports of progress coming out of the talks. Oil prices sold off sharply after a report that sanctions on Iranian oil were lifted. That was later clarified that they were lifting sanctions on some Iranian oil entities and individuals.
Now over the weekend, Bloomberg News reports that Iran's lead envoy said that a deal was unlikely before the presidential election in his country. President Hassan Rouhani who negotiated the original deal in 2015 is due to leave office in August after serving two terms, and he is widely expected to be replaced by Ebrahim Raisi, a cleric generally seen as hostile to engaging with the US according to Bloomberg News. Most oil traders realized that if Raisi is in power the likelihood of an Iranian nuclear deal getting done is small.
The Bloomberg report also said that the Iran council said it reached a broad agreement with the US over the lifting of sanctions on its industrial sectors including energy but warned that there was very little time left to revive a 2015 nuclear deal. Based on market action in hedge fund activity it appears that the market is putting the Iran deal in the rearview window and now focused on the tightening of the global oil supply.
Now there is a breaking report of a leak at a Chinese nuclear facility. CNN reports that the US government has spent the past week assessing a report of a leak at a Chinese nuclear power plant after a French company that partly owns the plant warned of an imminent radiological threat according to US officials. The warning accused the Chinese safety authority of raising the acceptable limits for radiation detection outside the ties on the nuclear power plant in the Guangdong province to avoid having it shut down. No word as to whether Facebook is going to block any report about this nuclear plant currently.
While the world's oil demand goes up the big oil companies continue to retreat away from oil production. Royal Dutch Shell, too, recently has been put under big pressure by its shareholders to become greener is now reportedly looking into selling their massive US Permian Basin holdings; reportedly the Shell assets in the Permian basin could be worth as much as $10 billion. Shell's retreat from fossil fuels production along with other big energy companies pulling back is going to substantially raise fossil fuel prices in the future.
Shell has been under pressure after a Dutch court last month ordered Shell reduce its greenhouse gas emissions by 2030, much faster than the company planned. Shell is looking to appeal that ruling but in the short term it's taking action to sell off its properties and reduce its oil production capabilities. OPEC and Russia, of course, are sharing these type of moves that it's going to further end their dominance over the global oil supply as well as the global economy for generations. People realized that the ability to produce energy produced power but not only the power that we used to turn on lights or drive our cars but political power as well. Make no mistake about it that OPEC and Russia will use their energy powers to push the political agenda. They've done it in the past, they will do it again.
Oil prices are holding up well even as gold gets beat up ahead of the Federal Reserve meeting and the grain market tumbles as the Biden administration is looking to relax biofuel requirements. It appears the trade is waking up to the fact that while big energy companies retreat from production, demand is not going to retreat leading us to a tighter and tighter global supply versus demand ratio.
Last week's gasoline demand seemed to disappoint but the implied demand numbers from the Energy Information Administration were likely skewed due to the Colonial Pipeline mishap. If gasoline demand indeed is weak, you would never know it by pulling up at the gas pump. AAA puts the national average of gasoline at $3.08 per gallon. It seems that we're not getting our normal post-Memorial Day dip in prices and that could be because the gasoline demand situation is only getting stronger. The national average for premium is at $3.69 a gallon and diesel fuel is at $3.21 per gallon. As we predicted, as it was apparent that President Biden was going to be elected that America voted for higher gasoline prices and that has proven to be true beyond a shadow of a doubt.
The heat was driving natural gas prices sharply higher, as well as reports of TETCO having one of its pipelines reduce pressure caused a strong rally. If the heat won't let up, we're going to see sharply higher natural gas prices later in the summer. Make sure you're prepared with some options as the situation for natural gas looks more bullish by the day.
Learn more about Phil Flynn by visiting Price Futures Group.