Global Oil Market - June 20

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Saudi energy minister says market on course for rebalancing. Saudi energy minister Khalid al-Falih said that the oil market would rebalance by the end of the year, a prediction that is unchanged despite the recent downturn in prices. "Current expectations indicate the market will rebalance in the fourth quarter of this year, taking into account an increase in shale oil production," al-Falih said. He dismissed the negativity in the market as irrelevant and the work of speculators. "Markets determine prices but are themselves driven by unpredictable variables beyond the control of producing nations…Short-term volatility is mostly a reaction to short-term factors ... as well as the role of speculators in stock markets that increase market volatility."

Middle East conflict escalates. A flurry of security events took place in the Middle East on Monday, raising fears of an escalating political crisis that has been described as the worst in decades. Iran launched missiles into Syria, targeting ISIS. It was the first Iranian military attack in another country in three decades. Also, the U.S. shot down a Syrian government plane, a move that sparked a warning from Russia. Russia said any U.S. plane flying west of the Euphrates River would be treated as a target. Meanwhile, Saudi Arabia said it has detained three members of Iran’s Revolutionary Guard Corps, which it says was approaching the Saudi offshore oil field of Marjan. The events come as tensions have spiked over the suspension of diplomatic relations with Qatar. There is a lot going on, but for now, the oil markets are shrugging off the tension. In the past, events like these would cause an immediate price spike of a few dollars per barrel. But with oil inventories at record levels, traders are hardly worried about a disruption.

Oil producers are no longer hedging their production because prices have fallen too much. As a result, major consumers are the ones now doing the hedging. Bloomberg reports that options prices are now being driven by airlines and shippers hoping to lock in cheap fuel. “This is a significant shift in the relative producer-consumer hedging behavior,” David Schenck, a cross-commodity strategist at Societe Generale, said in a note. “While consumers may try to lock in low prices, most producers will simply refuse to lock-in loss-making prices.”