Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Oil prices sold off after President Donald Trump’s fire and fury comments in response to the rising threat from North Korea. Reports that North Korea has created a small nuclear war head and now is threatening Guam is increasing the odds of a major conflict. Concerns that rising tensions may inhibit growth saw oil fall along with stocks. Yet a bullish American Petroleum Institute report and a renewed commitment by OPEC cheaters to rein in over production, is giving oil support but still raises the larger question as to whether a conflict with North Korea is ultimately bullish or bearish for oil.
It is a question one would not like to bring up but it is one that sadly, at some point, we may have to deal with. Oil producers still must do business and provide services and consumers will still need oil. War, at least conventional war, is generally bullish for oil. Initially the market sold off after President Trump’s comments because of concern that war fears could hamper economic activity. Yet if the war drums continue to beat we should see oil rise especially because the uncertainty from the fall out of what war might bring. During the months leading up to Operation Desert Storm in Iraq oil railed about 12.5%. After the initial attack prices fell hard but there was a clear victory, at least militarily. This time with North Korea there may be no easy answer or quick conclusion. One hopes Kim Jong Un can pull back from the brink of madness but we cannot count on it.
The US military is the largest institutional consumer of oil in the world and consumes more than 100 million barrels of oil a year which is more that the entire country of North Korea consumes. North Korea is totally dependent on oil shipments from China and Russia which could cut off supply and bring North Korea and its military to its knees. That is the best threat to avoid war but we need China and Russia to act now. If they do not, it may be too late.
In the more mundane world of supply and demand things are looking bullish. The API reported a massive 7.89 million barrels drop in crude supply as US and global oil inventories continue to drain at a record pace. The US has the best handle on reporting oil supply and with strong demand in China and Europe, the draw is a sign that oil supply overhang is going away. This is also proving what I have been saying for some time that shale oil production cannot offset OPEC cuts and rising demand.
Even the EIA is acknowledging that in their Short-Term Energy Outlook report. They are calling for a record 9.9 million barrels per day of oil production in 2018 and that’s lower than previous forecast that was at one point over 10 million barrels a day. They warned that, “U.S. oil production growth could slow as some U.S. energy companies plan less investment spending for the rest of this year and the number of drilling rigs has recently increased at a slower clip.”They also say that, “the monthly increase in U.S. onshore oil production during the second half of 2017 is expected to slow from the pace seen during the first six months of this year.”
This should be welcome news to OPEC who met and then put out a statement that producers like the UAE, Iraq, Kazakhstan, and Malaysia all expressed full support for the existing monitoring mechanism and willingness to fully cooperate in the months ahead to achieve the goal of reaching full conformity. In other word’s they swear they are going to stop cheating on production and the monitor committee will be watching.
Gas prices are on the rise, but that is a good thing according to the Energy Information Administrations. (EIA). They say, “U.S. consumers are buying record amounts of gasoline this summer, even though pump prices are higher than last year. A growing economy and more people working are major contributors to higher gasoline consumption this summer.” Sometimes rising prices are a good sign especially when it is more reflective of people going back to work. Gas demand will be watched today as the API reported a surprise 1.529 million barrel.
The $50 a barrel mark is the key resistance. The best thing the bears have going is a seasonal top in demand. The bulls have falling supply and geopolitical risk on their side. We should see oil breakout higher soon especially if we see a big draw in oil in today’s EIA report.
Tropical storm watch. The U.S. National Hurricane Center said Topical Storm Franklin is gaining momentum. The storm was expected to gain more power as it moved across the lower reaches of the southern Gulf of Mexico and likely would be a hurricane by Wednesday evening, the center said. Franklin’s center was 240 miles (386 kilometers) east-northeast of Veracruz early Wednesday and it was heading west at 13 mph (21 kph). A hurricane warning was in effect for Mexico’s coast from Puerto de Veracruz to Tuxpan. A tropical storm warning was in effect for the Mexican coast east of Puerto de Veracruz to Ciudad del Carmen and from north of Tuxpan to Barra del Tordo.
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It is going to be a wild day! Stay tuned to the Fox Business Network all day! Our Summer Soltice Webinar coincided with the oil bottom! Find out why oil is making its move. Call me at 888-264-5665 or email me at firstname.lastname@example.org
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