Oil Price Rally: What's next?

[dan_s]

https://oilprice.com/Energy/Energy-General/Oil-Prices-Soar-as-Geopolitical-Risk-Rises-Rapidly.html

Russia also launched a major attack on Kiev. Geopolitical risk to oil supply will remain high.
Hamas has rejected Israel's peace proposal. Peace in the Middle East won't happen easily.

Israel and Hezbollah in major missile exchange as escalation fears grow

Hezbollah launched hundreds of rockets and drones at Israel early on Sunday, as Israel's military said it struck Lebanon with around 100 jets to thwart a larger attack, in one of the biggest clashes in more than 10 months of border warfare.

Missiles were visible curling up through the dawn sky, dark vapour trails behind them, as an air raid siren sounded in Israel and a distant blast lit the horizon, while smoke rose over houses in Khiam in southern Lebanon.

On Sunday evening, sirens sounded in Rishon Letsiyon, central Israel, the Israeli Defense Forces (IDF) said, and added that one projectile had been identified crossing from the southern Gaza Strip and falling in an open area. The armed wing of Hamas said it had fired an "M90" rocket at Tel Aviv.

Any major spillover in the fighting, which began in parallel with the war in Gaza, risks morphing into a regional conflagration drawing in Hezbollah's backer Iran and Israel's main ally the United States.

With three deaths confirmed in Lebanon and one in Israel, both sides indicated they were happy to avoid further escalation for now, but warned that there could be more strikes to come.

Hezbollah leader Sayyed Hassan Nasrallah said the Iranian-backed group's barrage, a reprisal for the assassination of senior commander Fuad Shukr last month, had been completed "as planned".

However, the group would assess the impact of its strikes and "if the result is not enough, then we retain the right to respond another time", he said.

Israel's foreign minister said the country did not seek a full-scale war, but Prime Minister Benjamin Netanyahu warned: "This is not the end of the story."

Earlier, Netanyahu had said: "We are determined to do everything we can to defend our country ... whoever harms us - we harm him".

The two sides have exchanged messages that neither wants to escalate further, with the main gist being that the exchange was "done", two diplomats told Reuters.

Expectations of an escalation had risen since a missile strike in the Israeli-occupied Golan Heights last month killed 12 youths and the Israeli military assassinated Shukr in Beirut in response.

Hezbollah had delayed its retaliation to give time for ceasefire talks, and had calibrated its attack to avoid triggering a full-scale war, a Hezbollah official said.

U.S. Defense Secretary Lloyd Austin ordered the presence of two aircraft carrier strike groups in the Middle East, bolstering the U.S. military presence. Earlier, top U.S. General C.Q. Brown arrived in Israel for talks with military leaders.

DENSE BOMBARDMENT

Israel's air strikes started before Hezbollah began its barrage, Nasrallah said. Netanyahu said these "pre-emptive" strikes had foiled a much larger Hezbollah barrage but Nasrallah said they had had little impact.

Hezbollah's own rocket and drone strikes were focused on an intelligence base near Tel Aviv, Nasrallah said. Netanyahu said all the drones targeting what he called a strategic location in central Israel were intercepted.

A security source in Lebanon said at least 40 Israeli strikes had hit various towns in the country's south in one of the densest bombardments since hostilities began in October.

Hezbollah said the strikes killed two of its fighters in al-Tiri. The Hezbollah-allied Shi'ite Muslim group Amal said a strike on Khiam killed one of its fighters.

Israel's military said a naval soldier was killed and two wounded.

Lebanon's caretaker prime minister, Najib Mikati, met cabinet ministers at a session of the national emergency committee.

Flights to and from Ben Gurion airport in Tel Aviv were suspended for around 90 minutes. Some flights to and from Beirut were also halted, stranding passengers.

WARNING SIRENS

In northern Israel, warning sirens sounded and explosions were heard in several areas as Israel's Iron Dome aerial defence system shot down rockets coming from southern Lebanon.

"Israel should, as it did this morning, deliver a pre-emptive strike. But if Hezbollah continues, Israel should strike very hard to remove the threat from Hezbollah once and for all," said Yuval Peleg, 73, from Haifa.

A resident of the southern Lebanese town of Zibqeen told Reuters he had awakened "to the sound of planes and the loud explosions of rockets - even before the dawn prayer. It felt like the apocalypse."

The White House said U.S. President Joe Biden was following events. "We will keep supporting Israel's right to defend itself, and we will keep working for regional stability," National Security Council spokesperson Sean Savett said.

United Nations Secretary-General Antonio Guterres was "deeply concerned" by the escalation between Israel and Hezbollah and called on both parties to immediately return to a cessation of hostilities, his spokesperson said.

Egypt and Jordan also warned against escalation.

The United States was not involved in Israel's strikes on Sunday, but provided some intelligence about incoming Hezbollah attacks, a U.S. official said.

Hezbollah fired missiles at Israel immediately after the Oct. 7 attacks by Hamas gunmen on Israel. Hezbollah and Israel have been exchanging fire constantly ever since, while avoiding a major escalation as war rages in Gaza to the south.

That precarious balance appeared to shift after the strike in the Golan Heights, for which Hezbollah denied responsibility, and the subsequent assassination of Shukr, one of Hezbollah's most senior military commanders.

Shukr's death in an air strike was quickly followed by the assassination of Hamas political leader Ismail Haniyeh in Tehran, which led to vows of reprisals against Israel by Iran.

Hamas meanwhile rejected new Israeli conditions in Gaza ceasefire talks, casting further doubt on the chances of a breakthrough in U.S.-backed efforts to end the 10-month-old war.

(Reporting by James Mackenzie, Maytaal Angel, Maayan Lubell in Jerusalem, Maya Gebeily and Timour Azhari in Beirut, Adam Makary and Phil Stewart in Cairo and Kanjyik Ghosh in Bengaluru; Writing by Angus McDowall; Editing by William Mallard, Frances Kerry, Alison Williams, Hugh Lawson, Giles Elgood and Sandra Maler)

Reuters

[dan_s]

Bloomberg:
Libyan Rival Government to Stop Oil Output Over Bank Row
> Dueling governments fight over leadership of central bank
> Biggest export terminal Es Sider starts cutting oil shipments

Libya's eastern government says all oilfields to close
By Reuters
August 26, 2024 7:56 AM
https://www.reuters.com/world/africa/libyas-eastern-based-government-close-all-oilfields-2024-08-26/?utm_source=substack&utm_medium=email

[dan_s]

Why OPEC Can’t Afford To Reverse Oil Output Cuts
By Irina Slav

Rising oil production in the US, Guyana, and Brazil is challenging OPEC's ability to reverse its output cuts.
The EIA forecasts that global oil supply will fall short of demand in the second half of 2024, further complicating OPEC's decision.
Despite market expectations of a cut reversal, OPEC may need to maintain its current production levels to balance market share and oil price stability.

OPEC is unlikely to reverse any of the production cuts that it approved last year as growing production from non-cartel countries is on the rise, pressuring prices.

The observation, made by BP’s chief economist Spencer Dale, could inject some optimism into oil markets, where many appeared to expect that the very mention of a possibility for a reversal makes that reversal a certainty.

OPEC earlier this year said that given the right market conditions, it could begin to roll back the cuts—a total of 2.2 million barrels daily for the group and its OPEC+ partners—in the last quarter of this year. For some reason, business media and traders took this to mean that the right market conditions will manifest themselves, basically guaranteeing the rollback. Ironically, that perception removed those right market conditions from the scenario as it pressured prices.

To date, OPEC cannot afford to bring a single barrel back to the market, especially as it continues dealing with members that do not stay within their quotas. A bigger threat, however, is growing production in the United States, Guyana, and Brazil, according to BP’s Dale.

These three are regularly referenced in discussions about global oil supply and the rivalry between OPEC and non-OPEC producers for control of the market and international prices. The U.S. is clearly the biggest factor, with production there adding about 1 million barrels daily last year—but widely seen growing more slowly this year.

The Energy Information Administration forecast production growth at a modest 300,000 bpd this year in its latest Short-Term Energy Outlook, where it also revised down its oil demand growth projections for the year to 1.1 million bpd.

Oil demand is the crucial factor for production plans, of course, both among OPEC members and non-OPEC producers—and it does not guarantee continuous strong growth. Brazil, for instance, saw its oil output add 13% last year to a record high of over 3.4 million barrels daily. This year, however, production growth has wobbled, and in April, the total fell back to some 3.1 million barrels daily.

The country has plans to boost its output of crude oil to 4.4 million barrels daily by 2034, which would be 47% higher than the current level of production, but achieving those plans would depend on prices—and demand.

Guyana—the other producer that BP’s Dale mentioned as a key factor in oil these days—has been expanding its production rather consistently over the past few years. Still, it bears noting that it started from zero back in 2019, reaching a production rate of over 600,000 bpd this year as Exxon ramped up at the Stabroek Block. The EIA forecast in its latest STEO that Guyana’s output will rise further to over 800,000 bpd next year.

As I told you in my newsletter, US oil production declined from April to May by 61,000 bpd.

So, if the forecast crude oil production growth materializes, it would certainly make it even harder for OPEC to roll back those production cuts as the combined growth of the United States and Guyana would come in at over 1 million barrels daily, essentially offsetting about half of the OPEC cuts. OPEC is indeed in a tight spot. But here’s the thing—the oil market appears to be in a deficit.

Global oil inventories are on a consistent decline path, and the EIA recently forecast that supply will fall short of demand for oil by some 750,000 bpd in the second half of the year, which was an upward revision from an earlier projection of 500,000 bpd. The oil market is in a deficit, and prices are still down. OPEC will not be rolling back the cuts any time soon.

By Irina Slav for Oilprice.com

[Cliff_N]

That rally lasted 24 hours. Any ideas on why the whole sector is being clobbered today? We get a breather on one day, the next any advance is taken away. Very frustrating. Most of us made good money when oil was 50-60 dollars per barrel. Now at 75+++ a daily flogging. Very strange. Little to no recovery since the massacre on August 6th.

[aja57]

The problem is and will always be the paper trader's market of oil. Physical oil has no leverage in this market. This isn't about fundementals that Dan and Harry ascribe too, this is about power and control by quasi government technocrats posing as market makers. What we are experiencing is a choreographed, price control scheme by Western countries to ward off the OECD push to raise prices. The unintended consequence will be a massive dearth in physical supply . Remember Cliff, its election season.

[Cliff_N]

aja57, thanks for the informative reply and the reminder on election season. I do expect this volatility during Options week. Agree that it is manipulation regardless of fundamentals or companies. You can see the collapse across all companies in the sector at the about the same time using graphical run charts (small multiples).

[dan_s]

There has been no solid evidence of lower demand for oil-based fuels and other products. U.S. and OECD petroleum inventories are below normal.

There is a lot of FEAR of recession that will lower demand for oil. The FEAR is being fueled by speculation, but no evidence of lower demand for oil. Regardless of who is right about year-over-year oil demand growth (IEA or OPEC), demand is going up. India's demand growth offsets any lower demand in China.

OPEC+ controls the price of oil because they control all spare capacity. No reason to believe they will raise output.

Non-OPEC supply growth (U.S., Canada, Brazil and Guyana) now looks to be less than expected.
> Latest EIA 914 report shows U.S. production down in 2024 from 13,308,000 bpd in December to 13,178,000 bpd in May
> Brazil and Guyana now expected to grow much slower than forecasts of six months ago.

Last but not least: All of our upstream companies are profitable at today's oil price. Even EQT, the most exposed to natural gas, is still free cash flow positive in 2024 thanks to hedges.

Oil price volatility will continue, keeps coming back to the $75 to $85 range.

[aja57]

Nuttall chimes in...

https://x.com/ericnuttall/status/1828428886054511068

[Cliff_N]

Great chart from Eric (note Yellow arrow at the bottom, we are here):

[aja57]

Dan, is it possible that the unintended consequence of OPEC+ clamoring for $80 dollar and lowering ouput has created a defacto price control for the last several months that has resulted in lower oil supply in that chart of Nuttall's? Sorry but unless there is WWIII, I don't believe all these worldwide skirmishes mean a rat's ass to the paper markets. These "issues" are not following the historical patterns of the past on oil price.

[Cliff_N]

Agree, in Feb-2021 to Jan 2022, I pulled data from CPE and did a regression analysis of Oil Price (X) and CPE Closing Price (Y) and r^2 was 65.9%, meaning that 65.9% of the change in price was related to price of oil. Special causes have dominated since. News on the series of COVID variant scares, shut down of China economy news, and Fed, first "inflation is transitory" to OMG! we need to start raising rates. The news has created a lot of noise that has destroyed the relationship between the closing oil price and closing stock prices of various companies. Just did a relationship between CIVI and WTI 2022 to 2024 (August) and the relationship is flat, showing -19% with an increase in oil. Of course the chart is dominated by special causes, making the analysis useless.

[KGardiner]

I agree that some sort of paper trade is at work. The game could go on for quite some time, but at some point producers cutting back, and low prices stimulating demand and economies will create such an inventory deficit, that the paper trade will break and break badly. Think 2008.

I've no clue how long the game can go on. Biden taking sips from the oil market to refill the SPR certainly isn't going to change anything. But growing production cuts in the face of falling prices will eventually force a reversal.

In the meantime, last quarter's dividend payouts will buy me more reinvestments at lower prices.

Kevin

[ChuckGeb]

Will go on until all the votes are cast.