Global Oil Market - August 31

[dan_s]

Storms a Brewing by Phil Flynn at 9AM ET on 8/31/2018

Oil closed back above $70 a barrel as storms, both real and politically, started to develop. Already on the rise after U.S. oil supply fell 2.6 million barrels this week that raised even more concerns about the market’s ability to replace plunging Venezuelan oil production and Iranian exports, that reportedly are already falling. Now you get Mother Nature involved with more storm activity brewing out in the Atlantic, then you have a very bullish outlook. The only thing that is pulling oil prices back down today is another force of nature, President Donald J. Trump. The President has threatened to pull out of the World Trade Organization (WTO) if they don’t ‘shape up” and put more sanctions on China that would hit 50% of all China’s imports. Yet, China’s oil demand is staying strong regardless. China reported today that factory activity was higher than expected in August, with the official manufacturing Purchasing Manager's Index (PMI) expanding at 51.3. A lot of winds are blowing but our mid-month call that the lows for the year are most likely in for oil, is looking solid at this point.

The Labor Day holiday brings back memories of monster hurricanes from Hurricane Katrina and recent memories of the devastation of Hurricane Harvey. Oil saw more buying come in as traders covered shorts in part because of new storm developments that may not turn out to be anything major, but could impact shipping and operations around the Gulf of Mexico next week. Still traders don’t want to take chances over the long weekend, especially one with bad storm memories.

The National Hurricane Center issued advisories on Potential Tropical Cyclone Six, located a couple of hundred miles east-southeast of the Cabo Verde Islands. They put the formation chance through 48 hours...high...90 percent. Most models show that the storm will miss land but how it impacts shipping lanes remains to be seen. The storm that oil traders really moved on is much smaller but is expected to end up in the Gulf of Mexico and its track is right into Refinery row after passing over Florida. The NHC called it a tropical wave and is producing a large area of cloudiness and showers from Hispaniola eastward to the Leeward Islands and the adjacent waters. This activity is forecast to spread westward to west-northwestward, but strong upper-level winds are expected to prevent any significant development of this system during the next several days.

But, they say that environmental conditions could become more conducive for some development when the system reaches the eastern Gulf of Mexico during the early to middle part of next week. Regardless of development, this system could produce enhanced rainfall across portions of Hispaniola, the Bahamas, the Turks and Caicos Islands, and Florida into early next week. The formation chance through 48 hours...low...near 0 percent and the * Formation chance through 5 days...low...10 percent.

Yet, that storm can’t compete with Donald Trump. Bloomberg News reported that U.S. President Donald Trump is prepared to put tariffs on $200 billion more in Chinese imports as soon as a public comment period on the plan ends next week. That would mean that 50% of all goods imported from China would have tariffs. Not just industrial goods, like he has targeted before, but on consumer goods from electronics, fabrics and foods.

The President also said that the WTO needed to shape up or he would pull out of the World Trade Organization if it doesn’t treat the U.S. better, targeting a cornerstone of the international trading system. “If they don’t shape up, I would withdraw from the WTO,” Trump said Thursday in an Oval Office interview with Bloomberg News. Trump said the agreement establishing the body “was the single worst trade deal ever made.”

The comments and tariff threats helped pull back the U.S. stock market that had been surging around record highs, and overnight it weighed on oil as well. Yet, every time stocks have pulled back on Trump Tariffs, it has always come back. Add that with turmoil in Argentina with their pinging currency macroeconomic fears are tempering strong oil demand and tighten oil supply buying.

Oil Products were strong as record gasoline demand and near record distillate demand supported prices. Reuter reported that OPEC and non-OPEC oil producers will aim to formalize their long-term cooperation later this year by approving a charter that will make possible further joint action on output, according to a draft charter seen by Reuters.

Reuters is also reporting that Iran has given ballistic missiles to Shi’ite proxies in Iraq and is developing the capacity to build more there to deter attacks on its interests in the Middle East and to give it the means to hit regional foes, Iranian, Iraqi and Western sources said.

Natural gas finally got a bearish storage report but with record heat and tropical storms brewing no one seemed to care. The EIA said that working gas in storage was 2,505 Bcf as of Friday, August 24, 2018, according to EIA estimates. This represents a net increase of 70 Bcf from the previous week. Stocks were 646 Bcf less than last year currently and 588 Bcf below the five-year average of 3,093 Bcf. At 2,505 Bcf, total working gas is below the five-year historical range. < NOTE THAT WE ARE NOW IN THE SECOND "SHOULDER SEASON" AND NATURAL GAS STORAGE ALWAYS BUILDS MORE THIS TIME OF YEAR BECAUSE OF MILD WEATHER BETWEEN SUMMER AND WINTER. THEY CALL IN "FALL". - Dan

[dan_s]

My take is that after Labor Day there will be more focus on Iran and more focus on the amount of natural gas in storage.

It does not appear that Iran's leaders are going to give in to "Regime Change" easily. They like their jobs and their heads. If there is any direct military conflict between the U.S. and Iran, the price of oil spikes. If Iran even attempts to shut down flow of oil coming out of the Persian Gulf the price of oil spikes. If Trump orders the U.S. Navy to block Iranian tankers coming out of the Persian Gulf the price of oil spikes. If Iranian backed rebels shoot at Saudi Tankers heading into the Red Sea (which they have already done), the price of oil goes up.

Iran's oil exports are already down 500,000 to 700,000 barrels per day and the really tough sanctions don't start until November.

Natural Gas
> On the surface, last week's storage build of 70 Bcf looks high, but not when compared to the 5-year average build of 65 Bcf for last week.
> We are now in "Shoulder Season #2" and the 5-year average builds are 78 Bcf per week during this 8 week period.
> My forecast is that natural gas in U.S. storage will be 3,275 Bcf on Friday, November 16. < This will put storage 575 Bcf below the 5-year average when winter draws begin.
> BTW a colder than normal winter in the eastern half of the U.S. is now the forecast.
> One early December cold wave will start the spot market bidding war between the utility companies.
> Go here http://www.americanoilman.com/ and click on the Gas Storage tab.