Energy Prospectus

WTI is flirting with $71/bbl this morning.

Going Nuclear by Phil Flynn at 8:30AM ET

Oil prices are going nuclear as President Donald Trump pulled out of the Iranian nuclear accord creating a new risk dynamic for global oil markets. The decision by president Trump to pull the plug on what he said was a horrible deal comes as global oil demand is rising and the lack of investment in the oil patch is making it difficult for global oil production to keep pace with demand.

Even the fact that the Energy Information Administration raised its 2018 crude oil production estimate (for the United States) to a record 10.72 million barrels a day this year and another record projection of 11.86 million barrels a day next year, it was not enough to calm the market as the super cycle in oil, that we predicted a few years back, is becoming more apparent to the market place.

The deal means shale oil producers will win, as well as U.S. Energy Companies, if they did not commit a lot of money to Iran. Even the commitment by Saudi Arabia to help stabilize the global oil supply was not comforting, considering that the Saudis want $80 a barrel oil anyway. The UAE also vowed to step in if needed but the reality is that even with the oil coming out of Iran the global oil market is currently undersupplied as it is.

The Saudis also of course are forced to shoot down missiles fired from Iranian backed Houthi Iranian rebels. That happened again overnight as the Trump Administration laid out more Irianian misdeeds as its reason for pulling out of the deal, such as their support for the Assad regime in Syria and its complicity in Assad’s atrocities against the Syrian people. In Yemen, the Iranian regime has escalated the conflict and used the Houthis as a proxy to attack other nations. In Iraq, Iran’s IRGC sponsors Shia militant groups and terrorists. In Lebanon, the Iranian regime enables Hezbollah to play a highly destabilizing role and to build an arsenal of weapons that threatens the region, according to the White House.

The Wall Street Journal reports that Iran has recently been exporting 2.7 million barrels a day of crude, or close to 3% of global supplies. That supply will dwindle away and with demand growth it will keep oil prices on an upward track.

You see, even staying blindly in this Iranian deal the market was tightening anyway. The report from the American Petroleum Institute (API) is showing us just how much and is another reason why oil made more multi year highs overnight. The API reported a very disturbingly bullish picture for U.S. oil supply. The API reported not only a 1.85-million-barrel drop in crude oil supply, but a massive 6.674-million-barrel drop in distillate supply. That puts distillate stocks well below the five-year average and are dangerously low. Gasoline supply also fell by a sizable 2.055 million barrels leaving prices at the pump susceptible to even more price increases. As we have warned before, product prices are susceptible for upward price spikes so make sure you are hedged.

Here's What Oil at $70 Means for the World Economy. Bloomberg.
With the price of crude up 14 percent this year and now trading at the highest since 2014, exporters of the fuel get to enjoy a windfall while consuming nations get hurt. Much ultimately depends on the reason why prices are pushing higher. An oil shock on the back of constrained supply is a negative though higher prices due to robust demand may just reflect solid global growth. A run-up in oil prices poses a lot less of a risk to the U.S. economy than it used to, thanks to the boom in shale oil production. The old rule of thumb among economists was that a sustained $10 per barrel rise in oil prices would shave about 0.3 percent off of U.S. GDP the following year. Now, says Mark Zandi, chief economist at Moody’s Analytics, the hit is around 0.1 percent. And that all but dissipates in subsequent years as shale oil production is ramped up in response to the higher prices. The Baker Hughes U.S. rig count already is at a three-year high. Oil-producing states such as North Dakota, Texas and Wyoming should benefit from higher extraction activity.


US Iran sanctions spell the end of OPEC output deal. Reuters, opinion.
President Donald Trump’s decision to withdraw from the nuclear agreement with Iran marks the end of the current output agreement between OPEC and its allies. OPEC is likely to insist the current agreement remains in effect, at least for now, but the prospective removal of several hundred thousand barrels per day of Iranian exports from the market will require a major adjustment. Saudi Arabia has already promised to “mitigate” the impact of any potential supply shortages, in conjunction with other suppliers and consumer countries, in a statement released immediately after the sanctions decision. As a practical matter, only Saudi Arabia, the United Arab Emirates, Kuwait, Russia and the United States have the ability to raise production and exports in the short term. Saudi Arabia and its close allies Abu Dhabi and Kuwait hold almost all the spare capacity that could respond quickly to a reduction in Iranian exports. U.S. shale producers could also increase their output but it would take time and their light crude is not a good substitute for heavier Iranian oil.