Oil Market Update - Jan 25

[dan_s]

From the BMO Commodity Markets Group after the markets closed on 1/25/2019:

"Prompt WTI was able to claw back the week’s losses approaching where it closed last Friday to end at $53.69 (+0.56/bbl). Brent joined the party today, up the same amount closing at $61.64/bbl. The rally continues to be driven by political unrest out of Venezuela which could threaten an already declining production base. Bloomberg reported that crude could fall by as much as 33% from 2018 levels (~1.3 Million barrels per day) and that the US continues to consider sanctions on their oil exports- all this coming atop of OPEC and Russian production cuts. Other positive signs on the day were a rallying equity market (on the back of positive earnings reports) and the expectation that the Trump White House would agree to a deal to re-open the government, which it did, if only for 3 weeks at around 3:15 pm EST this afternoon. Oil rig counts increased by 10 today recovering after last week’s 21 rig drop moving in the opposite direction of market expectations (as Platts had predicted another large drop). To sum up the week, crude inventories continue to grow, oil rig counts are back on track and US production is booming. Keeping prices supported is the usual mix of geopolitical uncertainty, US economic strength and OPEC intervention."

I saw a report today that in late December there was an Iranian missile attack on one of Israel's primary electric power stations. Israel's missile defense did its job and intercepted the strike to prevent a potential loss of electricity to over half of the country. The missile was launched from inside Syria. In the days following the attack, Israel's jets attacked Iran's bases in Syria.

IMO there is no geopolitical risk premium in the oil price today. The Middle East and North Africa are "powder kegs" that can blow up any day of the week. The situation in Venezuela is going from very bad to terrible. It has a the potential to cause major problems within the region. I expect the premium for diesel to go to $1.00/gallon this summer.

There is no "glut" of oil. OECD and U.S. crude oil inventories are at or below on a Days of Supply basis. IEA reported last week that in Q2 demand for oil will exceed supply.