Well, I’ve been thinking about all the places we’ve surfed and danced and all the faces we’ve missed. So, let’s get back together and do it again, exclaims Phil Flynn of PRICE Futures Group.
OPEC Plus once again got together and decided to do whatever it takes to support oil prices. This was expressed very directly by Prince Abdulaziz bin Salman who said at the OPEC International Seminar in Vienna, “We will do whatever is necessary, whatever it takes” to stabilize prices. This comes as Iran decided to attempt to seize two oil tankers, just for old-time sakes, but was thwarted by the US Navy. All these things are happening as the OPEC Plus cartel is gaining confidence about a rebound in global oil prices as the supply of diesel tightening is raising fears once again of a global diesel shortfall. And with all the talk of weakening demand, the reality is that the real data does not support the negative talk.
For example, on Friday the Energy Information Administration (EIA) revised its April demand estimate by 750,000 barrels per day, from 19.671 million bpd to 20.42 million bpd, a 3.8% increase. That revision means that oil demand in April was at a record high, above both April 2022 and April 2019. That increases the chances that the oil supply in the US will tighten in the coming weeks. Yesterday the American Petroleum Institute (API) reported that the US oil supply fell by 4.382 million barrels. Now with SPR oil releases ending and demand not falling the squeeze in the second half is setting up nicely. Last week we had an SPR release of 1.4 million barrels leaving only 300,000 barrels until the greatest oil market manipulation ends. The unprecedented attempt to lower prices has thwarted investment and will add to higher and longer prices.
OPEC's commitment means that they are going to send a message to the market and that even though the market failed to respond to production cuts, they are going to play the long game. S&P Global reported that Saudi Prince Abdulaziz bin Salman said, “Global oil demand is rising, central bankers are working to tame inflation, and OPEC+ output restraint will turn the tide of “exaggerated negativity” that has flooded the market, Prince Abdulaziz bin Salman told the OPEC International Seminar in Vienna. “You cannot change a negativity that is emanating from let’s say ten million traders,” he told a packed audience of industry officials and market participants, two days after Saudi Arabia announced it would hold its crude output at a two-year low of nine million b/d through at least August. But the negativity cannot last, and “I am very optimistic,” the prince added. “People should be in their comfort zone that this market will not be left unattended.”
Saudi Arabia also met with Iran at the conference talking about a joint relationship in developing hydrocarbon fields. Saudi Arabia has become closer with both Iran and Russia under the Biden administration. Biden’s harsh policies on Saudi Arabia have caused them to become closer economically with some of our adversaries.
Iran continues to enjoy sticking its nose into the Biden administration’s face. Iran’s attempt to seize two oil tankers in the world’s most important oil choke point, the Strait of Hormuz, was a bold action and it puts a little bit more of an increasing geopolitical risk factor on the price of a barrel of oil. In the meantime, Iran continues to laugh off US sanctions.
The Wall Street Journal reports what we have said that Iran is having no problems exporting oil. They wrote, “Iran’s oil exports have hit a five-year high in recent months as the country sells more to China and other countries, adding large volumes of discounted crude to a global energy market already struggling amid concerns over demand. The surge in Iran’s oil supply threatens to upend efforts by Saudi Arabia and other major crude producers to prop up prices by cutting output. Oil’s value has fallen by about a fifth since late last year on expectations of a slowing global economy and a glut of cheap Russian cargoes. It also shows how Iran is increasingly circumventing US sanctions as the Biden administration quietly resumes talks with Tehran in a bid to win the release of American prisoners held by the Islamic Republic and curb its growing nuclear program.
Iran’s oil shipments amounted to about 1.6 million barrels a day on average in June and May, according to commodity-data providers Kpler and Petro-Logistics, more than double the level of about a year ago and the highest since 2018 when the reimposition of US sanctions caused a slump. While the scale and final destination of Iran’s oil sales are difficult to gauge, given their often-covert nature, data from several firms monitoring the global energy trade indicate that China remains its top customer. Beijing directly imported 359,000 barrels a day of Iranian oil in May, up from about 266,000 barrels in the same month last year, according to Kepler. Industry watchers say Iran’s actual sales to China are likely much higher and include oil transshipped through other Asian and Middle Eastern countries according to the Journal.
We still see significant upside risks to the price of oil in the second half of the year. It is becoming clear that the market has overestimated the impact of increasing interest rates on global oil demand. Speculative hedge fund pessimism was betting that demand would collapse and has kept prices low and lower than they normally would have been in a situation where we have seen this type of type supply versus demand numbers. We think the prices have overcompensated to the downside, and at some point, will have to overcompensate on the upside to even things out.
There is more evidence that the global green energy transition has made the world a less stable place both economically and geopolitically. The green global elites continued to take the food out of the mouths of babes by increasing the cost of energy and food and adding to global poverty. The latest person to point this out was Angola’s Energy Minister H.E. Diamantino Azevedo who said, “In Africa, there are 600 million living in poverty and an energy transition can’t be imposed on them.” Of course, the green can and will. And while they will spend money to help support countries like Africa with their energy transition, at the same time to paraphrase Marie Antoinette they are saying that when it comes to supposedly saving the planet, “let them eat bugs.”
Natural gas is floundering, waiting for today’s injection. We peg it at 69 bcf. Some people think we’ll see a little bit of a supply surplus in July as production is up and LNG exports are down. I think that remains to be seen but we expect that the market is still on the bottom, but we may move sideways until we start to see the impact of hot weather.
Learn more about Phil Flynn by visiting Price Futures Group.
