Oil Price Forecast by Phil Flynn

[dan_s]

Phil Flynn at 9:30AM ET
Crude Oil: Could The Lows Be In?

I believe that it is very likely that the price of oil may have put in its low price for the year. Barring any shocking headlines or economic catastrophes, the technical seasonal outlook and the fundamentals suggest that the downside correction in oil should be over.

Oil should post a fourth day of gains as the American Petroleum Institute (API) reported a 5.17-million-barrel supply drop and raises serious doubts about last week’s massive oil supply increase, it should also reignite concerns of a tightening global oil market place. The API also reported that supply in the NYMEX delivery point rose by a much less than expected 195,000 barrels.

An hour after this report came out, EIA reported a 5.8 million barrel drop in U.S. crude oil inventories.

Last week’s massive crude oil supply increase was built on a surge of oil imports. Now a week later it looks as if the market is going to take back a large part of that increase and now the focus will once again focus on the upcoming Iranian sanctions and the potential for more production losses from the failing socialist state Venezuela. It will also focus on the fact that the U.S. economy is still firing on all cylinders and that is keeping the demand for gasoline and distillate extremely strong.

Refiners last week were running at a record high but this week, according to API, gasoline supply fell by 930,000 barrels. That was more than the 500,000 barrels expected. U.S. distillates saw an increase of 1.8 million barrels more than the 1.5 million barrels expected but refiners must focus on those fuels as the classification is still below normal for this time of year and winter is coming. < "Distillates" includes diesel and home heating oil.

Oil actions seemed to suggest that the announced release of 11 million barrels of oil, from the Strategic Petroleum Reserve, is a nice gesture but won’t be enough to replace oil lost by Iranian sanctions. On the low-end, Iranian sanctions will cost the globe 1 million to 1.5 million barrels of oil a day. So, in the best-case scenario the SPR oil will be gone in 11 days. It is sour crude, so the refiners will be happy to turn it into much needed distillate.

Another risk down the road to the market is the Paul Manafort conviction, Michael Cohen’s plea deal and the potential risk of a President Trump Impeachment. While that is down the road and the market only had a short-term downward reaction, if this news sways the midterms it won’t bode well for the economy or oil demand. Love Trump or hate him, he has been a major factor in the soaring U.S. economy and record U.S. oil demand. His movements in reducing regulations and cutting taxes has unleashed the world’s largest economy that was being held back by bureaucratic red tape, over regulation and bad tax policies. I know that now the Democrats are trying to take credit for the economy but how can you take credit for doing things that you said were impossible to do in the first place. Things like a 4.1% GDP or bringing back U.S. manufacturing and jobs. A perceived return to more regulation and higher taxes may reverse the course of prosperity and perhaps send the economy back into recession.

Reuters is reporting that “The production numbers of OPEC and (countries) outside OPEC will be reviewed at the next OPEC meeting in Algeria, and before the end of the current year there will be an agreement on a mechanism to monitor output next year."

[dan_s]

I have posted here several times this year that distillate inventories are too low and there could be a gap between supply and demand.

Per IEA today: "U.S. demand for distillate fuel oil is at its highest level in more than a decade. During the first five months of 2018, U.S. distillate fuel oil product supplied (the volume delivered out of the primary supply chain, which is a proxy for demand) averaged 4.2 million barrels per day (b/d), an increase of more than 270,000 b/d from the 2017 level and the highest level since 2007. This strong U.S. demand is supporting distillate prices, crack spreads, and production. At the same time, U.S. distillate exports are down from record-high levels set in 2017. Despite record refinery runs and lower exports, distillate inventories in the United States have declined because consumption has outpaced the rate at which inventories have been replenished."

See details here: https://www.eia.gov/petroleum/weekly/ar ... _print.php

This is a BIG DEAL because the Global Economy runs on distillates (fuel for trucks, trains and ships) and BTW Jet Fuel inventories are also less than 22 days of supply.

This is why the U.S. refiners will continue to run at a very high utilization rate.

[dan_s]

The front month NYMEX contract (October) for WTI closed today at a two week high, up $2.02/bbl during regular trading to close at $67.86. It is still drifting higher in after-hours trading.

Credit is given to the larger than expected drop in U.S. crude oil inventories reported by both API and EIA, but continued weakness in the U.S. dollar should also be given some credit.

HOPE of a trade agreement with China increasing is another plus, but the Big Elephant in the room will continue to be Iran. Consensus on how much oil new U.S. sanctions against Iran will take off the global market have increased to 1.0 to 1.5 million barrels per day. U.S. shale oil and OPEC cannot make up that supply loss much on short notice.

Oil closing over $67/bbl sets the stage for a retest of $70/bbl. WTI touched $70.13/bbl on July 30, 2018. Between $70 and $75 there is very little technical resistance.