Oil Price Nov 28 - Comments from RJ

[dan_s]

Note received from Raymond James energy sector team this afternoon.

"The oil market has experienced a sharp selloff over the past month; as we explained in this recent stat of the week, the culprits for the selloff include mixed newsflow surrounding Iran sanctions, seasonal refinery maintenance, and the strong U.S. dollar. Despite the currently negative sentiment, we see a broadly supportive fundamental backdrop for oil: the larger U.S. producers are exhibiting restraint in capital allocation; OPEC+Russia's gradual unwinding of production cuts is being offset by declines in Venezuela and sanctions-related pressure on Iranian exports; there are still supply declines in several non-OPEC geographies; the picture for global demand growth is broadly upbeat; and IMO 2020 is looming on the horizon. Meanwhile, the Permian midstream bottlenecks are sustaining a widened Brent-WTI spread. The 12-month futures strip ($51.76/Bbl for WTI and $60.33/Bbl for Brent) shows modest short-medium term contango followed by a relatively flat curve. Several wildcards remain in play, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones; and 2) on the bearish side, the prospect of further strength in the U.S. dollar."

MY TAKE:
> Fed Chairman Powell's comments today lowers the chance of more interest rate hikes. Good news for the overall market and it should put a lid on the U.S. dollar index.
> If the dollar stabilizes or moves lower, that will remove a headwind for oil prices. See: https://www.marketwatch.com/investing/index/dxy/charts
> Crude oil traded lower today, but that is probably just the usual negative reaction to a build in U.S. crude oil in storage. Again, there is no "glut". U.S. crude oil inventories are actually slightly lower than they were a year ago.
> EIA's report shows a spike in refinery utilization which IMO more than offsets the small build in crude oil inventories. Refiners know they need to rebuild distillate inventories.
> High demand for home heating oil and diesel combined with too much ultra-light shale oil will expand the price difference between gasoline and diesel.
> Record holiday retail sales is another very good sign. Low gasoline prices may be contributing to higher consumer confidence. Lower income taxes also helps.