The Price Futures Group – Both Sides Now

Commentary, Crude oil, News, Technical Analysis

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I’ve looked at oil from both sides now, from supply demand and still somehow, the glut illusion I still recall , they really don’t know oil at all. Both Brent and West Texas Intermediate reached new highs in the oil “super cycle” achieving highs that we have not seen since OPEC started the oil production war Thanksgiving 2014.

While the focus quite obviously has been on the supply side of the equation, you must look at both sides now. Watch demand and rising oil demand expectations. Sure, Iran sanctions are a big part of what’s going on with the supply side but the Trump trade deal with Mexico and Canada as well as some rock-solid manufacturing data in the US  rocking the demand side. The ISM said its purchasing managers index fell to 59.8 in September from 61.3 in August, although a reading above 50 still indicates growth in the manufacturing sector but still just off a 14 year high, signaling better than expected demand growth for oil.

For too long, many were focused only on supply side on oil  and the perception that  the oil supply would always remain high. Oil companies believing that oil prices would be lower, cut trillions of dollars in cap x cuts, reducing future oil supply anywhere from 8 to 10 million barrels a day of future output. We are already seeing the impact of those Cap X cuts because production continues to fail to keep pace with earlier pessimistic demand growth estimates.  In fact, all three  major reporting agencies, the International Energy Agency, the U.S. Energy Administration and OPEC is calling for  another year of oil demand growth next year. Reuters reports that the average of the three agencies’ forecasts is growth of 1.53 million bpd in 2018 and 1.46 million bpd in 2019, reaching 100.9 million bpd on average next year That only means that on average that global oil production in a 100million barrel a day market will only exceed production by a mere 580,000 barrels a day.

Keep in mind that in recent years most of these agencies underestimated demand, and with Trump’s new United States Mexico Canadian Trade Agreement (USMCA) you will have to raise those forecasts for  oil demand  even more. This will put more pressure on OPEC to raise output but once they do that, it raises the issue of spare oil production capacity, which by all estimates is at historic lows. It also will pressure China to come back to the trade negotiating table.

This does not mean they won’t try. Russia is already rasing its output. Bloomberg News reported that  Russia’s oil production rose to a post-Soviet high last month as the country completely rolled back the output cuts it had agreed on with OPEC, then pumped some more. The country produced a record 11.356 million barrels of oil and condensate a day in September, according to data released Tuesday by the Energy Ministry’s CDU-TEK statistical unit. That’s an increase of almost 150,000 barrels a day from August and follows Russia’s June agreement with OPEC to boost supplies amid climbing prices.

Oil prices are also releasing that President Trumps squeeze on Iran’s oil supply is working with almost every country trying to stop buying Iranian oil. Even China’s SINOPEC has lowered it loadings of Iranian crude. India a major Iranian oil buyer, has vowed 100% compliance. The US is also not going to release oil from the SPR to replace Iranian crude mainly because they know that it will only have a limited impact on the overall situation. They know they must allow the market to adjust to a world without Iranian oil for an extended period.

Still with oil hitting our seasonal target of $75, we should be on guard for some profit taking or consolidation. As far as our beginning of the year target of $84 for crude this year is right on target. We believe that all the new talk of $100 a barrel crude is premature, unless we have a major disruption.

Oil’s next move may really be about the weekly supply report. Tonight, we get the API as refiners are in the maintainance season. Still we should see oil supply fall as the export window is open wide. A  rig count should signal a flattening of US production until we can open more space on the pipeline front.

It is still endless summer for Nat gas. Above normal temperatures as well as nuke maintenance, is giving us a boost! Buy puts.

Thanks,
Phil Flynn


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