May 8, 2018 • Reprints
Crude oil prices surged closing at above $70 a barrel for the first time in three-and-a-half years, only to have a nuclear meltdown in aftermarket trading. WTI further set a record 2.7 million contracts of open interest but fell hard after President Donald Trump tweeted that he would announce his decision on the Iran nuclear deal on May 8, 2 p.m. Eastern.
That tweet caused a selling frenzy taking a dollar off the price of crude in a very short period. It could have been a simple case of “buy the rumor, sell the fact,” but it still can be because some fear that perhaps the President had a change of heart. Yet, overnight it seems clear that the United States more than likely will pull out of the deal and that will impact global oil supply. Many leaders from other countries who want to deal with the United States will shy away from buying Iranian oil. Even if Europe finds a way to stay in the deal, the most likely outcome is that Iran will have to give a big discount on their oil to move it.
We also have more fears that Venezuelan oil exports will continue to fall. ConocoPhillips reported it will take Caribbean assets of state-run PDVSA to enforce a $2 billion arbitration award. The move is going to make it difficult for PDVSA’s to do business.
On top of that Bloomberg News is reporting that “Military officers are joining the exodus of Venezuelans to Colombia and Brazil, forcing President Nicolas Maduro’s government to call upon retirees and militia to fill the void. High desertion rates at bases in Caracas and the countryside are complicating security plans for the presidential election in 13 days, which by law requires military custody of electoral materials and machinery at voting centers.
Yet, oil traders would do themselves a disservice if they focused on geopolitical risk alone. While some believe risk is the only reason for prices rising, it is only part of the oil bull market story. Demand is the real story and it is demand mixed with underinvestment that helped erase the biggest oil glut of all time. The U.S. economy is doing great. Even the critics of the Trump tax cuts are now acknowledging the benefits to all Americans. The Washington Times reports that April was the best month in history for the U.S. budget, according to Congressional Budget Office figures. The federal government took in a record tax haul in April in route to its biggest-ever monthly budget surplus, the Congressional Budget Office said, as a surging economy left Americans with more money in their paychecks — and thus more to pay to Uncle Sam. All told the government collected $515 billion and spent $297 billion, for a total monthly surplus of $218 billion. That swamped the previous monthly record of $190 billion set in 2001.
China demand has been surging as well. Platts reported last week that China ended the first quarter of 2018 with robust apparent oil demand growth of 6.8% year-on-year, as stronger-than-expected GDP growth boosted consumption from the industrial and construction sectors and outweighed concerns over rising oil prices, S&P Global Platts calculations based on latest official data showed.
Platts says that the apparent oil demand growth number for Q1 not only reflected a recovery in demand in China, but it also sent a signal that the rally in crude oil prices has so far failed to make a dent on demand in Asia’s biggest energy consumer (Brent crude has risen nearly 11% in 2018). The 6.8% year-on-year GDP growth aided China’s overall oil demand to rise to 12.36 million b/d in Q1, much higher than the 4.1% growth seen in Q1 of 2017. For the whole of 2017, demand growth was at 5.5% year on year.
Rising shale oil production in the United States has not kept pace. Of course, that means a golden age for shale producers. As the world looks to shale to fill the void of years of short-sighted underinvestment they should flourish if they don’t get too greedy.
Despite the nuclear meltdown, oil breaking $70 a barrel opens a move toward $73 a barrel. U.S. refiners must ramp up and with the supply of heavier products in tight supply they will favor heavier crude. Gasoline demand will stay strong as the weather warms up and farmers are finally getting in the field. Now add some geopolitics to the mix and we are set up for a potential upward spike.
Milk futures are on the rise! Old time inflation indicator. Gold struggling as the dollar rises on haven bid. The yen may also benefit from the geopolitical uncertainty.