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Iran Trumps Inventory. The Energy Report 09/12/19


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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 U.S. is back in the number 1 spot 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 minster 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 $25.00 a 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 a 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. In this month’s OMR, we maintain our growth estimate for 2019 at 1.1 mb/d, even though June data show that demand increased year-on-year by less than 0.2 mb/d. For the second half of 2019 we retain the view that with oil prices currently about 20% lower than a year ago there will be support for consumers. Early data for July suggests that global demand grew by 1.3 mb/d year on year.”

The IEA reported, “In recent weeks, tensions in the Middle East Gulf have eased and oil industry operations appear to be normal. The major political event that has taken place is a personnel change in Saudi Arabia with the appointment as energy minister of Prince Abdulaziz bin Salman, who is a well-known and experienced figure. An early event for him is a meeting of the OPEC+ agreement monitoring committee that takes place in Abu Dhabi as we publish this Report. To date, support for the agreement rate has been high, but ahead of the meeting data for August show the compliance rate slipping to 116 per cent. In August, three major countries Russia, Nigeria and Iraq, produced 0.6 mb/d more than their allocations. Saudi Arabia, on the other hand, produced 0.6 mb/d less than allowed, and it is clearly the lynchpin of the whole deal. A reminder to the producers that competition for market share is getting tougher comes from preliminary data showing that in June the US momentarily overtook Saudi Arabia and Russia as the world’s number one gross oil exporter.”

Our balances for 2H19 imply a stock draw of 0.8 mb/d, based on the assumption of flat OPEC production, stronger demand growth and weaker non-OPEC supply growth. However, this is only really a breather: the 2H19 non-OPEC growth, although modest by recent standards at “only” 1.3 mb/d, is measured against the high base set by the enormous production surge seen this time last year. So far in 2019, US crude oil production growth has stalled with June output only 45 kb/d higher than in December. Even so, output is still growing strongly on an annual basis, rising this year by 1.25 mb/d, with 1 mb/d of growth to come in 2020. In Norway, long-awaited projects are coming on stream earlier than expected and may ramp up to peak production ahead of schedule. Oil production in Brazil is growing fast, reaching 3 mb/d in August, 0.4 mb/d higher than just two months earlier.”

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.

Finally, in January the International Maritime Organization’s new marine fuel regulations are being introduced. For oil in 2019, published in March, we concluded that markets will be generally prepared for the shift, assuming a certain initial level of non-compliance. In this report, we have looked at the latest developments in demand and refining and we reaffirm our view of a relatively smooth start for the new rules. In line with this view, markets are not currently signaling significant increases in diesel prices, but this is an issue that will be monitored closely.
Thanks,
Phil Flynn

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About the author


Mr. Flynn is one of the world's leading energy market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.

Phil Flynn's accurate and timely forecasts have come to be in great demand by industry and media worldwide. His impressive career goes back almost three decades, gaining attention with his market calls as writer of “The Energy Report”.

He is a daily contributor to Fox Business Network where he provides daily market updates and analysis. Phil’s daily commentary is also featured in Futures Magazine, International Business Times, Inside Futures, 312 Energy, Enercast, among many others.

Phil is a lifelong resident of Illinois. He attended Daley College in Chicago before beginning his career on the trading floor of the Chicago Mercantile Exchange which eventually led him and his team to The PRICE Futures Group.

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Contact Phil Flynn: (800) 769-7021 or at pflynn@pricegroup.com

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