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
Supply shocks come in different flavors. Supply shocks like when the Energy Information Administration added 28 million barrels of phantom barrels of crude during the last 5 weeks, and supply shocks like we saw after two tankers were attacked in the Gulf of Oman. The oil risk factor just went through the roof after one, but perhaps two oil tankers, were attacked in the Gulf of Oman.
Fox News reported that “Two oil tankers were damaged in a suspected attack off the Gulf of Oman early Thursday, according to multiple reports.”
The U.S. Navy’s Bahrain-based Fifth Fleet told Reuters it was assisting two tankers in the Gulf of Oman after receiving two distress calls. Details of the incident were unclear, but one of the operators made an unconfirmed report that a torpedo had hit its ship, Reuters reported.
The attack in the Gulf of Oman feeds into the Strait of Hormuz, where at least 30% of the global supply travels.
It will be critical to find out who carried out these attacks, because the how and why could be critical to the safety of global oil supply and the health of the global economy.
Iran would be the prime suspect as they have threatened these types of attacks, but some wonder about the timing of the attack. Iran is meeting with Japanese Prime Minister Abe in a trip to Tehran to ease U.S.-Iran tensions with the Trump administration’s blessings.
So, it is possible that Iran is losing control of its proxies and splinter groups that may decide to carry out terror attacks on their own without the Iranian government’s blessings. If this is the case, the global oil market has entered a new and very dangerous world.
The risk to supply is much more dangerous from attacks in the Gulf of Oman, and the recent increase in U.S. supply may be giving us a false sense of security. So much of our oil supply is light oil. Many are suspecting that the recent big upward crude adjustments from the EIA is condensate. The theory is that refiners used to use that condensate to mix with heavier Venezuelan and Saudi Arabian crude. Because Venezuelan exports to the U.S. have gone to zero, condensate barrels are adding up.
OPEC is also warning that the global trade war is hurting global oil demand. In their report they, along with others, feel that the trade tensions are hurting demand. Of course, it also increases the odds that OPEC will extend their production cuts. The cartel production dropped by 236,000 barrels per day in May to 29.88 million bpd, the lowest level since June 2014. They also cut its global oil demand growth to 1.14 million bpd in 2019.
Yet with all the talk of slowing demand, U.S. demand is still strong. The EIA reported that U.S. demand, even with bad weather and based on total products supplied over the last four-week period, averaged 20.4 million barrels per day, down by 0.1% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.5 million barrels per day, down by 0.2% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels per day over the past four weeks, down by 0.2% from the same period last year. Jet fuel product supplied was up 5.4% compared with the same four-week period last year.
The shock in oil needs to be watched. We believe that this is the event that should put in the bottom on oil. The EIA needs to tell us soon where these extra barrels are coming from. The lack of a clear answer is raising the risk to the economy. If it turns out that the extra barrels they are reporting are unusable, then we may have bigger issues and risk going forward.
Make sure you stay tuned to the Fox Business Network for all the latest developments on this breaking story.
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