Energy Prospectus

WTI moved over $66/bbl this morning, but EIA weekly report could put a ceiling on it. "Drums of War" are beating and that caused a big spike in Brent.

LONDON (Reuters) - The oil price hit its highest level in more than three years on Wednesday after U.S. President Donald Trump threatened to fire missiles at Syria in response to a suspected chemical attack last week. Some major airlines were re-routing flights on Wednesday after Europe's air traffic control agency warned aircraft flying in the eastern Mediterranean to exercise caution due to possible air strikes on Syria.

Trump has criticized Moscow for standing by Syrian President Bashar al-Assad.

"Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and 'smart!'," he wrote in a post on Twitter on Wednesday.

Brent crude jumped to a high of nearly $72 a barrel, its strongest since early December 2014, after Trump's comments, while gold rallied for a fourth day as investors ditched risk-linked assets such as equities.

The United States and its allies are considering air strikes against Assad's forces following a suspected poison gas attack last weekend.

Syria is not a significant oil producer, but any sign of conflict in the region tends to trigger concern about potential disruption to crude flows across the wider Middle East, home to some of the world's biggest producers. There are also concerns that the United States could renew sanctions against Iran.

"The focus right now is definitely on a possible military strike against Syria," said Commerzbank's head of commodity research, Eugen Weinberg.

"We think the fundamentals do not justify the current price, but unfortunately the market is focusing more on the politics and ignoring some of the warning signs, especially the hike in U.S. oil production."

Saudi Arabia Energy Minister Khalid al-Falih said on Wednesday that his country would not sit by and let another supply glut surface, implying that the de-facto leader of the Organization of the Petroleum Exporting Countries (OPEC) would continue to withhold supply.

Not all oil market indicators suggest the price will continue to rally strongly, analysts said.

U.S. crude inventories rose by 1.8 million barrels to 429.1 million barrels in the week to April 6, according to a report by the American Petroleum Institute (API) on Tuesday, compared with analysts' expectations for a decrease of 189,000 barrels. < Keep in mind that U.S. crude oil inventories are already below the 5-year average and way too low on days of supply. - Dan

The U.S. Energy Information Administration (EIA) said on Tuesday that it expects domestic crude oil production in 2019 to rise by more than previously expected, driven largely by growing U.S. shale output. < Pipeline bottlenecks and other logistics issues may slow down U.S. oil production growth, especially in the Permian Basin. This world will need every drop of U.S. oil because there is very little production upside outside of North America.

The Road to $80 Oil By Keith Kohl
Written Apr. 11, 2018

When he’s right, he’s right.

Yesterday, Christian DeHaemer laid out one of the best cases for why you should be tapping into the oil sector right now.

It’s simple, really.

As my cubicle cellmate pointed out, the fundamentals are too good to ignore. It’s only a matter of time before global crude demand tops 100 million barrels per day, and that psychological benchmark could come as early as 2019.
< It is actually going to happen in Q3 2018.- Dan
If nothing else, the supply/demand balance alone should give you a reason start looking into oil stocks.

Yet there’s more to this story than most investors truly understand.

You see, even though the fundamentals are bullish, they aren’t the only thing that can push oil prices higher.

In fact, there are several catalysts lined up right now that could send oil straight past $80 per barrel.

And one of them has already been triggered...

Oil’s Road to $80

Things don’t get much worse than the state of Venezuela’s oil industry. As one of the founding members of OPEC, it’s a shame how things turned out.

To say it’s on the verge of collapse isn’t hyperbole, either.

A recent report suggested that 90% of Venezuela’s hard currency is obtained through oil exports. You don’t need me to tell you how bad things are going to get when oil production collapses.

In 2016, the country’s oil output fell by 12%; last year it dropped by another 13%.

Make no mistake, dear reader: the end is within sight.

Over the last decade, PDVSA’s oil output has been propped up by the Chinese, who have been investing tens of billions to keep Venezuela’s oil flowing. As it stands now, up to 600,000 bbls per day is taken right off the top and shipped to China to pay off the interest on its debts.

I have a feeling the Chinese are fully aware that their investment is a lost cause. Do you really think Chinese banks will continue burning that cash?

Last month, Venezuela’s oil production plummeted by another 100,000 barrels per day.

Tick-tock.

Don’t get me wrong, the loss of heavy Venezuelan crude on the global market isn’t going to send crude into the triple digits overnight like it would have a decade ago.

It is, however, a perfect storm for U.S. exports.

If I had told you back in 2007 that the United States would be exporting more than 2.5 million barrels of oil per day, I probably would’ve been laughed out of the room.

The loss of Venezuelan crude from the global market is a huge catalyst for U.S. tight oil and prevents that delicate supply/demand balance from being upset.

The bears have been thrown into the backseat as fears of a trade war between China and the U.S. diminish.

That’s good news for U.S. oil drillers, especially given the fact that China is the third-largest importer of U.S. oil.

Chinese President Xi’s promise to lower import tariffs and open the economy sent crude soaring. As I write this now, crude has already rallied to nearly $66 per barrel.

And then we have the geopolitical mess in the Middle East...

Pushing aside the fact that both OPEC and Russia are showing record compliance to the previously agreed-upon production cuts, the escalating threat is being wholly underestimated right now.

Again, if this situation occurred a decade ago, we’d see oil climb to $100 practically overnight.

The most recent chemical attack in Syria is just one event that could trigger a nightmarish situation, with Israel immediately taking action.

Think of the dominoes that are lined up right now. The United States is weighing its options, with a looming strike still very likely against a Russian-backed Assad. Rumor has it that even the Saudis may take action.

Those three countries account for over 30 million barrels of oil per day of global supply.

I’ll let you picture the scenario of what could happen if two of those superpowers go head to head.

Things could get really ugly from here.

Until next time,

Keith Kohl