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 are staying strong despite a strong dollar and unfolding stories about geopolitical risk. While the risk remains high that President Trump will pull out of the Iranian nuclear accord, talks of peace in the Korean peninsula is shocking the world. A major win for the Trump Administration and for a world that wants peace. Fox Business Network is reporting that North and South Korea on Friday agreed to work on achieving “a nuclear-free Korean Peninsula through complete denuclearization.” South Korea’s foreign minister said she believes President Donald Trump is largely responsible for bringing North Korean leader Kim Jong-un to the negotiating table and raising hopes for an end to the state of war that has existed between North and South Korea since the 1950s. Of course, with North Korea you must be wary and verify but the possibility of peace in the Korean peninsula would be a historic world-changing achievement that most people thought would have been impossible just a few months ago. Iran is still talking tough and so is President Donald Trump. Already there are reports from traders that they are slowing oil deals with Iran in anticipation of a resumption of US sanctions on the country. This will tighten global supply that is already tightening due to underinvestment in oil projects. The global oil production decline rate is rising.
We have been telling buyers and sellers to hedge their risk petroleum and you can see why that is important in the current market environment that we are in. In fact, today “The Wall Street Journal” reports that “Companies feel the impact of rising oil prices and some are looking to pass on the extra energy costs to their customers, which would push inflation higher.” Of course, some inflation is what the Federal Reserve has been hoping for and they must love the fact that the inflation is being driven by US economic growth. The Journal writes in a must read “The highest oil prices in years are increasing expenses for companies that had grown used to low energy costs since crude’s 2014 tumble, while the turnabout is proving to be a boon for some businesses. Giant outfits from American Airlines Group Inc. to 3M Co. have warned this week about how persistent higher oil prices are boosting their expenses this year. (They should have hedged) In response, some companies are looking to pass on the costs to their customers, which would push inflation higher. That, in turn, could slow growth and weigh on an already vulnerable stock market.”
The Journal went on that “higher energy prices hits different industries over time, and it can take weeks or months before they can pass their higher costs on to consumers or vendors. Railroad operator Union Pacific Corp. reported Thursday that its fuel expenses surged 28% to $589 million in the latest quarter, with most of the increase coming from a 22% increase in diesel prices. However, Union Pacific passed along some of that higher cost to customers through fuel surcharges, which totaled $353 million, up 67% from the year-earlier period. The company, though, also benefited from higher demand for sand used in shale-oil extraction and a surge in shipments of crude, as higher oil prices spurred production. Union Pacific, which operates in the western U.S. where much of the shale exploration occurs, said its energy revenue jumped by 15% in the March quarter from the year-ago period, growing twice as fast as its overall business. Elsewhere, United Parcel Service Inc. said its fuel expenses jumped 21%, or $129 million, in the March quarter. But the company said fuel surcharges and higher prices helped offset rising delivery costs in its U.S. ground business. Rising diesel prices are weighing on trucking companies despite a surging freight market, though some of those costs also get passed on through fuel surcharges.” Make sure you read the Journal today.
Of course some of that pain has been enhanced by the doom and gloom bearishness that had been baked into the oil market the last few years. That and a crash in price led to a cutback of over a trillion dollars in CapX cuts that has left the market structurally undersupplied. Reuters reports today ”Saudi Aramco Chief Executive Amin Nasser said in March the global oil and gas industry needs to invest more than $20 trillion over the next 25 years to meet growth in demand and compensate for the natural decline in developed fields.” Qatar’s Energy Minister Mohammed al-Sada told Reuters this month that the global oil investment purse of around $400 billion would not be enough. In other words, the oil market super cycle that we predicted years ago is already well underway.
Market Watch Myra SAEFONG reported that The U.S. Energy Information Administration reported Thursday that domestic supplies of natural gas fell by 18 billion cubic feet for the week ended April 20. Analysts surveyed by S&P Global Platt’s had forecast a decrease of 12 billion cubic feet but on average over the last five years for the same week, inventories climbed by 60 billion cubic feet. Total stocks now stand at 1.281 trillion cubic feet, down 897 billion cubic feet from a year ago, and 527 billion below the five-year average, the government said.
It’s oil versus the dollar. Worries about soft data in the UK is causing a run in the dollar. Still with the tight market, oil should try to fend off the dollar rise.
Stay up to date with this and other breaking news all day on the Fox Business Network. I am out of the office today for a checkup team members Selo and Dan will be happy to take your call. Dial 888-264-5665 or email me at firstname.lastname@example.org. Also go to the Price group website to see our latest Pricelinks video on gasoline
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