The potential for market squeezes is increasing and I am not just talking about orange juice, but I could be as orange juice has been squeezed, exclaims Phil Flynn of PRICE Futures Group.

I am also not talking about putting the squeeze on our trade partners with the Biden administration’s politically motivated pause on LNG exports for a supposed climate change review. What I am talking about is the potential for a squeeze on WTI as we see Cushing, Oklahoma supplies fall, and a potential developing squeeze on diesel fuel. Not only is the market bracing for a response from the Biden administration on the drone attack in Jordan that was executed by an Iranian-backed group, but also if Biden makes good on the threat to reimpose sanctions on Venezuela and the Maduro regime. This, along with the increasing risk from geopolitical events, could cause a quick run for the exits by hedge funds that continue to favor the short side of the market.

Politico is reporting this morning that the Biden administration is considering retaliatory strikes against Iran which could include large-scale attacks on Iranian and proxy targets in Syria and Iraq as well as targeting Iranian naval assets. This comes a day after Bloomberg reported that “The Biden administration will restore sanctions on Venezuela’s energy sector if the country upholds its ban on an opposition candidate from running for president, two US officials said, a move that risks chilling recent efforts to improve ties between the two adversaries. The US will allow a six-month suspension on sanctions to expire in April if opposition candidate María Corina Machado is barred from running, and is also considering additional measures, according to the officials, who asked not to be identified discussing private deliberations.

Forbes reported that Chevron (CVX) is currently the only US oil major operating in Venezuela. Others have tried to fill the vacuum left by North American capital. European firms have stepped in searching for oil and natural gas: Repsol, Eni, Maurel et Prom, and Shell. This comes as the US crude supply is tightening significantly. Not only have we seen significant droughts in the CME group’s Cushing, OK delivery point, but we are also seeing the possibility of the loss of heavy oil once again as the Biden administration may be forced to crack down on Venezuela.

John Kemp at Reuters points out that, “Crude oil inventories at Cushing have dropped to their lowest level for this time of year in over a decade. The depleting stocks at Cushing and the bearish sentiment on the oil market, especially the recent more negative positioning in WTI Crude, could lead to high prices in the near term. In the three weeks to January 19, inventories at Cushing fell by more than five million barrels.

Crude inventories around the NYMEX delivery point at Cushing in Oklahoma had depleted to 30 million barrels on January 19 down from 35 million barrels three weeks earlier. Cushing inventories stood at the lowest for the time of year since 2012 and were 14 million barrels (-32% or -1.26 standard deviations) below the prior ten-year seasonal average. With inventories shrinking, many fund managers concluded it was no longer safe to run short positions potentially requiring delivery at Cushing according to Kemp.

Now because the Biden administration tried to enforce sanctions on Russia, they turned to Venezuela to secure heavy oil that refiners needed to make diesel. Yet the deal with Venezuela was for free and fair elections and the Maduro regime is not following through with that promise.

With increasing risks to supplies not only in the Red Sea but the possibility of an escalation between the US and Iran, the inventory numbers are going to be critical. There is more and more focus of course on the following supplies in Cushing, Oklahoma that are getting to critically low levels. On top of that, we are getting to the point where the seasonality for energies becomes very strong as refiners have to get geared up for the upcoming summer driving season. We still think that there’s a significant risk of an upside breakout and it could get worse if the shorts are forced to cover their positions. Yesterday’s market action was mixed but we think that a drawdown in oil inventories today could start turning this market around.

Natural gas, of course, is getting crushed because of the warm-up in temperatures. The expectations are that natural gas supplies will be ample and will be able to get through winter. We’re still waiting to see if these forecasts continue to stay warmer than normal and if that’s the case, we’re probably going to see a sideways downward movement in the natural gas market.

Learn more about Phil Flynn by visiting Price Futures Group.