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Phil Flynn

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

While Russia starts to waiver on its commitment to oil production cuts, the Trump administrations has a big decision to make on extending waivers to buyers of Iranian oil. This comes as the market prepares for the loss of Libya’s light oil and continuing reports of falling oil production in Venezuela. Yet despite all this turmoil, the Energy Information Administrations (EIA) is predicting that you will pay less for gasoline this year than you did a year ago. I can only assume that the people at the EIA don’t get out much or perhaps do not own cars.

Regardless, the oil market will get the EIA weekly supply report to see if it matches with last night’s American Petroleum Institute (API) report that showed a 4.1 million barrel crude oil increase but a disturbingly large 7.1 million barrel drop in gasoline supply as well as a 2.4 million barrel drop in distillate supply. The drop in product supply and the build in crude supply reflects not only refinery issues but extremely solid demand. It also means pump prices are going to keep going up despite the EIA’s optimistic prediction.

The EIA reported that U.S. regular gasoline retail prices will average $2.76 per gallon (gal), down from an average of $2.85/gal last summer. The lower forecast gasoline prices primarily reflect EIA’s expectation of lower crude oil prices in 2019. (Maybe they did not check the crude price lately) For all of 2019, the EIA expects U.S. regular gasoline retail prices to average $2.60/gal and gasoline retail prices for all grades to average $2.71/gal, which would result in the average U.S. household spending about $100 (4%) less on motor fuel in 2019 compared with 2018. Still if it was me, I would not be spending that extra 4% just yet.

Russia is also signaling that maybe it is time to raise production. Oil prices sold off modestly on reports that Russian Energy Minister Alexander Novak said there would be no need to extend the supply curbing deal if the market was expected to be balanced in the second half of the year. President Vladimir Putin also said that Russia did not support an uncontrollable rise in oil prices and that the current price of oil was good for Russia. The Moscow Times reported that Putin, the ultimate decision-maker in Russia, seemingly softened that stance, saying it was too early to judge whether the deal should be extended.

Well it is not too early for the market. The market is already telling you that it might be too late to raise output to stop a price rise. The main reason, of course, is OPEC, their co-conspirator Russia and their fearless leader Putin cannot control geo-political events that are out of their control.

You cannot predict whether Venezuelan oil will ever come back on-line and you can’t predict the outcome of a potential civil war in Libya. Above all, you can’t predict what President Trump might decide when it comes to granting waivers to buyers of Iranian oil. You also can’t predict whether the Saudis will listen to President Trump when he calls on them to raise oil output, since he deceived them on Iran oil sanctions the last time.

Reuters reported President Trump spoke with Saudi Arabia’s Crown Prince Mohammed bin Salman by phone on Tuesday, discussing Riyadh’s role in Middle East stability, maintaining pressure on Iran and the importance of human rights issues, the White House said. They did not seem to talk directly about oil. Reuters said that “Washington’s Middle East ally faces rising pressure over its handling of the war in Yemen and moves to stifle internal dissent, including the killing of journalist Jamal Khashoggi and prosecution of women’s rights activists.”

Of course, that did not stop investors into piling into the Saudi bond offering . The Wall Street Journal reported that Saudi Aramco raised $12 billion in its debut international bond Tuesday, according to people familiar with the sale, an issuance that sparked massive interest among investors eager to access the world’s most profitable company.

Government owned Aramco, known officially as Saudi Arabian Oil Co., received more than $100 billion in orders for its bond and had been expected to raise about $10 billion from the sale. Saudi officials are likely to view the large investor interest as a positive bellwether for the oil giant’s potential initial public offering, which is expected in 2021.

Despite the optimism by the EIA we still think there are serious upside risks for prices. We have maintained basically all year, that last year’s oil crash was way overdone due to some short term issues and prices would come back. We are facing the prospects of the tightest oil market since the early 2000s and despite talk of slowing growth from the International Monetary Fund, we believe that global economic stimulus will keep oil demand surprising to the upside.
Thanks,
Phil Flynn

 

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