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
Don’t tug on Superman’s cape. Don’t spit in the wind. Don’t fight the Fed. Don’t fight OPEC. Enjoy the volatility. Oil traders are talking themselves into a slowdown this morning as some economic data misses and the perception of ample supply has oil bulls drowning in their sorrows. Even calls for a rate cut by St Louis Fed official and voting Fed member James Bullard was taken as a negative. He said a rate cut could be needed soon and it sent the oil in a tizzy as it feared that the Fed was telling us a major slowdown in the economy is here. A weak U.S. manufacturing number and weak data from around the globe also played into the slowdown fears and despite assurances from Saudi Arabia’s Energy Minister that they would defend prices, oil closed poorly adding to more doom and gloom.
Yet despite the dour forecasts it is still turnaround Tuesday, and while short term some of the macroeconomic forces look scary, you can be assured that the Fed, and OPEC will have the oil market’s back. For one, rate cuts by the Fed are generally bullish for oil. Not only does it increase oil demand, it weakens the dollar which increases the crude price. A weaker dollar will further open the export window as countries will buy up U.S. oil and products. They may have to, as OPEC will double down on production cuts. Some analysts are predicting three interest rate cuts. That is probably crazy, but if that happens oil will have a hard time falling in price.
Saudi Energy Minister Khalid al-Falih said he will do what is needed to sustain market stability. Or as Mario Draghi might say, whatever it takes. Mr. al-Falih says that a consensus was emerging among the OPEC+ Russia group of oil producers to continue cuts into the second half of the year. There is even a suggestion that if oil prices don’t respond, the group may try to shock and awe the market with additional cuts. Why not? At these prices there is no reason to fear shale as they will have to cut-back their own spending at these levels, because it has been proven that most of them cannot make money at these prices.
The oil market may have to deal with a much larger cut in crude oil supply this week. Despite many of the former bulls now running to the short side of the market, the real underlying fundamentals of oil are tighter than the market now thinks. Despite U.S shale output hitting 12.3 million barrels, heavy crude globally is in tight supply. Last week the Energy Information Administration adjusted imports and exports that gave the perception of a higher supply than we actually have. This week we are looking for the EIA to correct downward crude supply, and that should mean a bigger that expected crude oil drawdown. The American Petroleum Institute (API) comes out tonight and last week reported a 5-million-barrel drawdown that was probably more in line with reality than the EIA.
Still despite my strong belief that this market is close to a bottom, you must respect the volatility and ask yourself what type of trader you are and what are you trying to accomplish. This break should be an opportunity to put on some long-term hedges, yet with the fear in the marketplace we could conceivably go lower. The Market has been respectful of support and resistance points so day traders and swing traders must be prepared to play the market up and down. Economically, we believe that the slowdown is temporary; created by fear and trade talk. Yet we do not think the globe is headed towards a recession. And if the Fed and OPEC do their part to support prices, we should see stability and a great long-term buying opportunity soon. In the meantime, just enjoy the ride. If the futures are too much, trade the options. The swings that we are seeing make them almost as tradeable as some futures contracts without the crazy risk.
Natural gas prices are in trouble. A victim of oversupply and overproduction will keep the pressure on. Unless we see some extreme heat soon, Natural gas could be on track to fall below 2 dollars.
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