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Oil Sends A “Crude Warning”

Oil Sends A “Crude Warning”

As with many Americans, I am on the road with the family making the traditional holiday rounds. Of course, my family is more “The Griswolds” than “The Waltons. but even with all of the antics, comedy, and occasional drama, it is always an enjoyable time of the year.

However, I did wake up from my tryptophan-induced coma long enough to pen a few thoughts on the crash in crude oil and the message it is sending.

On Monday, I am publishing an article on the fallacy that “falling energy prices are an economic boost.” It isn’t, and we dig into all the reasons why in that article.

However, the short version is that oil prices are a reflection of supply and demand. Global demand has already been falling for the last several months and oil prices are now waking up that reality. More importantly, falling oil prices are going to put the Fed in a very tough position in the next couple of months as the expected surge in inflationary pressures, in order to justify higher rates, once again fails to appear. The chart below shows breakeven 5-year and 10-year inflation rates versus oil prices.

Oil prices also tend to lead the broad economic cycle as well. The chart below is one of the broadest measures of economic activity and is comprised of leading economic indicators, Fed regional manufacturing surveys, NFIB small business survey, ISM, CFNAI, and Chicago PMI.

Since most of the economic data we look at is trailing, and subject to heavy negative revisions, the collapse in oil prices suggests that coming economic reports will likely be materially weaker than currently expected.

Can I Have A Side Of Debt

But there is another enormous problem currently for the oil and gas sector currently at risk – the debt.

…click on the above link to read the rest of the article…

U.S. And OPEC Flood Oil Market Ahead Of Midterms

U.S. And OPEC Flood Oil Market Ahead Of Midterms

Eagle ford rig

OPEC and the U.S. are together adding enormous volumes of new supply, which together have softened the oil market.

In October, OPEC hiked oil production to the highest level since 2016, back before the oil production cuts went into effect, according to a recent Reuters survey. The higher output, led by Saudi Arabia and the UAE, come just as Iranian oil is going offline. Also, Libya saw a sharp rebound in production, although the country is not part of the OPEC+ production cuts.

The 15 countries in OPEC produced an average 33.31 million barrels per day in October, the highest since December 2016. That was also up 390,000 bpd from September. “Oil producers appear to be successfully offsetting the supply outages from Iran and Venezuela,” said Carsten Fritsch of Commerzbank.

Russia, which is not part of OPEC but part of the OPEC+ coalition, continues to produce at post-Soviet record highs.

Iran lost 100,000 bpd in October, due to buyers cutting back as U.S. sanctions near, but the losses were more modest than many analysts had expected. In fact, despite the hardline rhetoric from Washington, the U.S. is poised to grant waivers to several countries that are unable to cut their imports of Iranian oil to zero.

That was largely predictable. Top importers of Iranian oil, including India, China and Turkey, could not slash their purchases to zero without incurring a significant economic cost. The U.S. pressed these countries, but ultimately had to back down. “We want to achieve maximum pressure but we don’t want to harm friends and allies either,” U.S. national security adviser John Bolton said on Wednesday. He recognized that some “may not be able to go all the way, all the way to zero immediately.” The admission is notable since Bolton is widely known as one of the most extreme hardliners when it comes to Iran.

…click on the above link to read the rest of the article…

Iran’s Worst Nightmare Is Coming True

Iran’s Worst Nightmare Is Coming True

Refinery

In what must seem like a nightmare scenario for Iran, not only is another U.S. president leveling sanctions against its economy, and particularly that economy’s lifeblood, its oil sector, but the current U.S. president has admittedly made it his mission to drive Tehran to its knees over what he sees as non-compliance over the 2015 nuclear accord between western powers and Tehran.

As recently as the start of this month, the oil markets narrative was that perhaps President Donald Trump had pushed a bit too hard by reimposing sanctions against Iran. Oil markets, for their part, were jittery while both global oil benchmark Brent and U.S. Benchmark West Texas Intermediate (WTI) futures hit four-year highs largely on supply concerns. Some predicted that $100 per barrel oil by the end of the year was imminent, while Tehran maintained a defiant tone, stating that neither Saudi Arabia nor OPEC would be able to pump enough oil to compensate for the loss of Iranian barrels, estimated between 500,000 bpd and 1 million bpd.

Now, what a different just a few weeks can make. Oil prices are now trending downward, falling for a third consecutive week as global stock markets tumbled and oil markets focused on a weaker demand outlook for crude going forward. Brent crude fell 2.7 percent last week and is down 10.5 percent from its October 3 high of $86.74. WTI ended the week down some 2.2 percent and has now dropped around 12 percent from its recent high of on October 3. Moreover, in a sign of things to come, hedge-fund and money managers are trimming their bets that crude oil prices will rise.

…click on the above link to read the rest of the article…

Is The Oil Supply Glut Set To Return?

Is The Oil Supply Glut Set To Return?

Barrels

Is the oil market tightening too much or is a glut on the verge of making a comeback?

There were a series of mixed messages from both OPEC and the IEA in recent days, offering a muddy outlook for the oil market. First was the TASS interview with Saudi oil minister Khalid al-Falih. His main message was that Saudi Arabia has enough spare capacity to cover for any shortfall related to Iran, although he noted that any further unexpected outages – from, say, Venezuela, Libya or Nigeria – would test the cartel’s abilities.

Libya appears to be doing its part for now. Mustafa Sanalla, the head of Libya’s National Oil Corp., said that Libya is aiming to increase production to 1.6 million barrels per day by the end of 2019, which would mark the highest level since the Arab Spring and civil war began in 2011.

Al-Falih remains confident that the market is well-supplied. But separately, he said that OPEC is in “produce as much as you can mode.” Meanwhile, a technical committee working within OPEC suggested that it would prepare options for 2019, which could include a production cut in order to prevent a supply glut from re-emerging. OPEC+ announced plans to increase production by 1 million barrels per day in June, but the deterioration of the global economy in recent weeks “may require changing course,” the committee said.

Despite his confidence in the TASS interview, al-Falih sounded a bit more concerned about too much supply when he spoke to Saudi media, admitting that he was worried about rising inventories. “We (have) entered the stage of worrying about this increase,” Al-Falih said. Indeed, the U.S. has seen a sharp increase in inventories lately. Crude stocks are up more than 28 million barrels since mid-September.

…click on the above link to read the rest of the article…

The Oil Markets Are At A Confusing Crossroads

The Oil Markets Are At A Confusing Crossroads

Market

The oil market is “adequately supplied for now,” but the supply losses from Venezuela and Iran leave the market suffering from “strain,” according to a new report from the International Energy Agency (IEA).

The IEA noted that global oil production increased by 1.4 million barrels per day (mb/d) on a net basis since May, which helped lead to an inventory build at an average rate of 0.5 mb/d during the second quarter and likely the third quarter as well. As a result of a sizable stockpile of oil in storage, and these higher levels of production, the oil market is not in danger of shortages at the moment.

However, that has come at the expense of spare capacity, which is already down to only 2 percent of global demand, “with further reductions likely to come,” the IEA warned. “This strain could be with us for some time and it will likely be accompanied by higher prices, however much we regret them and their potential negative impact on the global economy.”

Iran has already lost around 800,000 bpd in exports, and the disruptions are set to continue over the next month at least with U.S. sanctions taking effect in November. Also, the “ever-present threat of supply disruptions” from Libya, combined with the ongoing losses in Venezuela, leave the oil market vulnerable.

Taking a step back, the IEA paused to note the historic nature of today’s oil market. Both supply and demand are closing in on the 100-million-barrel-per-day mark for the first time. The agency used the opportunity to take a swipe at those who warned about peak oil supply. “Fifteen years ago, forecasts of peak supply were all the rage, with production from non-OPEC countries supposed to have started declining by now,” the IEA said.

…click on the above link to read the rest of the article…

Oil’s $133 Billion Black Market

Oil’s $133 Billion Black Market

rig

Oil is still the world’s leading energy source, with growing demand, a fluctuating pricing system, and much of its production in volatile regions. The oil market’s value is larger than the world’s valuable raw metal markets combined, with an annual production valued at US$1.7 trillion. A flourishing black market is no surprise, with about US$133 billion worth of fuels stolen or adulterated every year. These practices fund dangerous non-state actors such as the Islamic State, Mexican drug cartels, Italian Mafia, Eastern European criminal groups, Libyan militias, Nigerian rebels and more – and are a major global security concern.

The top five countries accused of oil trafficking – Nigeria, Mexico, Iraq, Russia, and Indonesia – are also producers. It is estimated that Nigeria alone loses US$1.5 billion a month due to pipeline tapping, illegal production and other sophisticated schemes. In Southeast Asia, about 3 percent of the fuel consumed is sourced from the black market, estimated to be worth up to US$10 billion a year. In Mexico, drug cartels launder drug revenues through the oil trade

Other countries are not immune. Turkey is not an oil producer yet serves as a major transit route for hydrocarbons flowing to Europe from OPEC countries like Iraq and Iran. As an energy hub, Turkey is strategically situated for the illegal trade and lost an estimated US$5 billion in tax revenue in 2017. An uptick in smuggling oil and other refined products began 2014, when ISIS took control of major Syrian and Iraqi oil fields.

As with most commodities, the volume of oil smuggling is primarily linked to fluctuating prices. With climbing oil prices, illicit trade is expected to increase.

…click on the above link to read the rest of the article…

A New Era Of Geopolitical Risk In Global Oil Markets

A New Era Of Geopolitical Risk In Global Oil Markets

City

Amid never ending talk and speculation over how many more barrels of Iranian oil will be removed from global markets once sanctions slated to hit Iran’s oil production on November 6 take effect, some are claiming that geopolitical factors have driven the market just as much as supply fundamentals.

At Russia Energy Week in Moscow last week, both Saudi and Russian energy ministers saidthey see rising geopolitical risk as driving the recent oil price increase at a time when there is sufficient supply in the market. Of course, the notion of sufficient supply will be tested soon, as will both Saudi Arabia’s and OPEC’s spare production capacity will be called on to maintain this supply.

“Prices are continuing to rise and I think that proves the point that it is not the fundamentals of oil supply and demand that is behind this price increase,” Saudi energy minister Khalid al-Falih said on Thursday during the conference.

“The market has a strong influence,” he added. “Financial investors, speculators, sentiment, future expectations. The true elephant in the room is geopolitics. That has all combined to feed the market frenzy.”

Following al-Falih’s cue, Russian energy minister Alexander Novak agreed that geopolitical risks were having a disproportionate impact on global oil prices, which have recently breached new four-year highs.

On Friday, global oil benchmark London-traded Brent crude futures dipped slightly but still settled at a robust $84.33 per barrel, a price point that could arguably mark the beginning of supply disruption in developing economies where a strong U.S. dollar and rising oil prices are already creating economic woe, especially in Asia, including the Philippines, Vietnam and India.

…click on the above link to read the rest of the article…

Oil Mania Redux

Oil Mania Redux

Positive Energy

By now, late September of 2018, it has become increasingly evident that something big is about to happen. What exactly that may be is anyone’s guess.  But, whatever it is, we suggest you prepare for it now… before it is too late.

Art auction energizer: Norman Rockwell’s portrait of John Wayne. You can’t go wrong shelling out top dollar for me, pilgrim, can you? [PT]

Several weeks ago, if you haven’t heard, an undisclosed rich guy enthusiastically bid up and then bought Norman Rockwell’s portrait of John Wayne for a cool $1.49 million at the 12th Annual Jackson Hole Art Auction. According to auction coordinator  Madison Webb, “There was a really positive energy in the room.”

Indeed, it takes a lot of really positive energy – and a healthy bank account – to shell out that sum of money for a painting of “The Duke.”  Still, positive energy, like good weather, can quickly turn negative. Soon enough, we suppose, the purchaser’s excitement will transform into a serious case of buyer’s remorse.

Of course, we could be wrong.  The buyer could have a special liking for old John Wayne movies.  Perhaps he’s a collector of Norman Rockwell paintings.  Or maybe he won the lottery and is compelled to burn through his winnings in odd and outlandish ways.

What this has to do with anything is a bit of a stretch.  But art, if this qualifies as such, offers a rough barometer of social mood (see:  The Bubble in Modern Art). Moreover, when the price for a painting of a 20th century actor pretending to be a 19th century character of American nostalgia sells at nearly a million and a half bucks, we suspect something more is at work.

…click on the above link to read the rest of the article…

What Will Trigger The Next Oil Price Crash?

What Will Trigger The Next Oil Price Crash?

Rig

Are we nearing another financial crisis?

The supply-side story for oil prices is heavily skewed to the upside, with production losses from Iran and Venezuela causing a rapid tightening of the market. But the demand side of the equation is much more complex and harder to pin down.

Economists and investment banks are increasingly sounding the alarm on the global economy, raising red flags about the potential dangers ahead. Goldman Sachs and JPMorgan Chase recently suggested that a full-scale trade war would lead the steep corporate losses and a bear market for stocks.

The Trump administration just took its trade war with China to a new level, adding $200 billion worth of tariffs on imported Chinese goods. That was met with swift retaliation. Trump promised another $267 billion in tariffs are in the offing.

JPMorgan said that after scanning through more than 7,000 earnings transcripts, the topic of tariffs was widely discussed and feared. Around 35 percent of companies said tariffs were a threat to their business, JPMorgan said, as reported by Bloomberg.

But the risks don’t stop there. The Federal Reserve is steadily hiking interest rates, making borrowing more expensive around the world and upsetting a long line of currencies. The strength of the U.S. dollar has led to havoc in Argentina and Turkey, with slightly less but still significant currency turmoil in India, Indonesia, South Africa, Russia and an array of other emerging markets. Currency problems could morph into bigger debt crises, as governments struggle to repay debt, and companies and individuals get crushed by dollar-denominated liabilities.

…click on the above link to read the rest of the article…

The Biggest Risk In Today’s Oil Markets

The Biggest Risk In Today’s Oil Markets

Refinery

The oil market is “tightening up,” but the Trump administration could still spoil oil prices if its aggressive trade war against China drags down economic growth.

The U.S. stepped up the trade conflict with China on Monday when the Trump administration announced $200 billion in tariffs on Chinese imports. The move had been expected for weeks but trade proponents had hoped that the administration would ultimately shelve the idea when push came to shove.

Not only did Trump move forward with punitive tariffs on China, but he also hinted that another $267 billion in tariffs are under consideration.

The trade war could hit the oil and gas markets in several ways. First, the back-and-forth escalation of tariffs could drag down economic growth. The first round of tariffs, which hit $50 billion in Chinese goods, targeted a relatively narrow set of products. But the latest $200 billion in tariffs will raise the cost for a wide array of consumer goods in the U.S., which could slow the economy. Specific industries that are affected by the tariffs will see more concentrated damage.

Second, oil and gas are likely to be specifically affected by the trade war, which wasn’t the case in the previous rounds of tariffs. China announced $60 billion in retaliatory measures on Tuesday, which included a 10 percent tariff on imported LNG from the United States.

The problem with the trade fight is that once the tariffs are in place, there is pressure on both sides not to back down. That doesn’t bode well to a swift resolution of this conflict.

Over the longer-term, the tariff upends the economics of building new LNG export terminals in the United States. China has emerged as the main driver of LNG demand growth, and any new export terminal located anywhere around the world likely has China at the center of its calculations.

…click on the above link to read the rest of the article…

 

Oil Markets Enter “Crucial Period”

Oil Markets Enter “Crucial Period”

Oil

Oil prices edged up this week on lost supply from Iran and Venezuela, although those supply concerns are somewhat offset by worries over demand.

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OPEC downgraded demand while the IEA said in a report that supply outages are “tightening up” the oil market. With Iran sanctions less than two months away, “we are entering a very crucial period for the oil market,” the IEA said.

Oil market remains “fragile,” Russian energy minister says. Russia’s energy minister Alexander Novak said that the global oil market remains “fragile” because of production declines and geopolitical unrest. “This is huge uncertainty on the market – how the countries, which buy almost 2 million barrels per day of Iranian oil will act. Those are Europe, Asia Pacific region … There is a lot of uncertainty. The situation should be closely watched, the right decisions should be taken,” Novak said. He said Russia could step in if the market needs more supply. “Russia has potential to raise production by 300,000 barrels (per day) mid-term.”

U.S. shale companies increased hedging for 2020. U.S. shale companies took advantage of relatively high oil prices in the second quarter to lock in hedges beyond 2019, according to the Houston Chronicle and Wood Mackenzie. Permian shale drillers increased 2020 hedging by 431 percent in the second quarter of this year, an indication that E&Ps are worried about pipeline bottlenecks stretching beyond 2019. WoodMac says the hedging activity that far out is unusual. The risk of hedging is that some companies could eliminate upside exposure if pipelines are completed on time and oil prices rise.

…click on the above link to read the rest of the article…

Why The U.S. Is Suddenly Buying A Lot More Saudi Oil

Why The U.S. Is Suddenly Buying A Lot More Saudi Oil

oil storage

For a few months now, OPEC has been boosting production to ease concerns about high oil prices amid expected supply losses from Venezuela and Iran.

The cartel’s largest producer and exporter, Saudi Arabia, has been specifically targeting an increase in crude oil exports to the most transparent market, the United States, which reports crude oil imports and inventory levels every week.

On the one hand, the Saudis are looking to regain their foothold in the American market after having cut shipments to the United States to a 30-year-low at the end of last year, when OPEC’s efforts to erase the global oil glut were in full swing.

On the other hand, the Saudis are responding to the demands of their staunch ally U.S. President Donald Trump, who has repeatedly slammed OPEC for the high gasoline prices, urging the cartel in early July to “REDUCE PRICING NOW!”

In the week to August 31, the four-week average of U.S. crude oil imports from Saudi Arabia exceeded 1 million bpd for the first time since June 2017, data by the EIA showed.

At that time last year, Saudi Arabia started to purposefully reduce its exports to the United States, where inventory data and refinery runs are reported every week. Those reports influence the price of oil and investor sentiment.

In the last week of October 2017, the four-week average of U.S. imports from Saudi Arabia was just 506,000 bpd—almost half of the four-week average of 1.009 million bpd for the last week of August this year.

In October 2017, U.S. imports from Saudi Arabia stood at 582,000 bpd—the lowest level since November 1987, as OPEC’s leader, its fellow OPEC members, and Russia-led non-OPEC allies part of the production cut pact were working to drain the global oil glut that weighed on oil prices and on the incomes of oil producing countries.

…click on the above link to read the rest of the article…

Emerging Market Contagion Threatens Oil Market

Emerging Market Contagion Threatens Oil Market

Oil terminal

The emerging market currency crisis is not over yet, and could yet morph into a broader contagion that threatens to drag down oil demand.

Last week, Argentina’s peso fell by around 20 percent in just a few days, taking year-to-date losses over 50 percent. The central bank frantically hiked interest rates from 45 to 60 percent in an effort to stem the losses, hoping to halt the peso’s spiraling descent. The peso regained a bit of ground, but now trades at over 37 pesos to the dollar, compared to 27 pesos per dollar in early August and 18 pesos at the start of the year.

This may seem like a problem for Argentines, but the currency turmoil is indicative of a broader malaise sweeping over emerging markets. A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down.

…click on the above link to read the rest of the article…

Why The Saudis Are Still Dominating Oil Markets

Why The Saudis Are Still Dominating Oil Markets

Bab El Mandeb Strait Tanker

Saudi Arabia is still clearly in control of the oil market.

The narrative that decisively took hold over the oil market in August was one of cracks in emerging market demand, concerns over the health of the global economy and fears over the fallout from the U.S.-China trade war. Turkey’s currency crisis set off a slide in emerging market currencies, which will likely undercut demand this year. The IMF warned earlier this summer that the downside risks to the economy were growing, a rather prescient prediction. On the supply side of the equation, outages from Iran loom large.

But when it comes to physical barrels on the market, Saudi Arabia is still in the driver’s seat. “While fears of trade wars will continue to influence sentiment and shape price outcomes, it is the recent shifts in OPEC, and particularly its dominant player Saudi Arabia’s, output policy which has had the biggest impact on physical balances, prices and the term structure to date,” The Oxford Institute for Energy Studies (OIES) wrote in a new report.

For the first few months of this year, Saudi Arabia maintained that the oil market was moving towards “rebalancing” with inventories in steady decline, but that there was more work to do. Saudi officials repeatedly stuck with the line that the OPEC+ agreement would not be altered before the end of the year and that they would continue to focus on bringing down inventories.

But the Trump administration’s withdrawal from the Iran nuclear deal and the return of sanctions raised fears of a huge disruption in Iranian supply. Suddenly, the market looked very tight. Coming just a few weeks before the June OPEC+ meeting, the U.S.’ policy change was decisive.

…click on the above link to read the rest of the article…

Oil Markets Are In For A Bumpy Ride

Oil Markets Are In For A Bumpy Ride

Oil rig sunset

The always-volatile oil market is set for even more volatility over the next two years as investors and speculators try to make sense of the conflicting market forces determining the pace of demand growth and global oil supply.

Over the past month, the two key themes have been how much Iranian oil will come off the oil market from U.S. sanctions in November, and how much demand growth could suffer with the trade wars. More recently, another theme is the emerging markets turmoil following Turkey’s crisis. Throw in all the new and much stricter International Maritime Organization (IMO) regulations on sulfur fuel oil requirements from 2020 that are expected to upend the refining and shipping markets, and oil prices are set for wild swings, industry executives and analysts say.

The severe IMO restrictions on fuel oil’s sulfur content—aimed at reducing emissions—will drive increased demand for middle distillates such as diesel and marine gasoil, which in turn will push up demand for crude oil, Morgan Stanley analysts say. This would boost crude oil demand by additional 1.5 million bpd, potentially sending oil prices to $90 a barrel in 2020, according to Morgan Stanley.

But before the 2020 regulation, analysts and investors are closely watching two currently unfolding developments—the sanctions on Iran’s oil and possibly weakening global oil demand growth—the main bullish and bearish factors, respectively, in the market right now.

“With new sanctions coming into play and also the IMO 2020, we see there is more volatility and therefore more opportunities to trade. So, we see our customers taking, slowly but surely, positions for that to happen,” Eelco Hoekstra, chief executive at independent tank storage company Vopak, told CNBC on Friday.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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