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
The big bear oil case consistently has been based on fears of a slowdown in the global economy. The case is that as the global economy slows, demand will fall, leading to a massive oil glut and ridiculously low prices. The only problem is that, once again, if you look at oil inventories, that case looks a bit flimsy. In yesterday’s report, we spent a lot of time focusing on U.S. inventories, but if you look at the global picture, we are seeing things that just don’t fit the bearish narrative. The best example is the fact that at the time of year when oil supply normally rises, like this maintenance season, inventories are instead falling.
A report from research form HFSI Research on the Seeking Alpha website pointed out that total global oil inventories are in an astounding counter-seasonal decline. They point out that total oil stock inventories dropped 4.5 million barrels globally last week, and they say that the global crude draws are going to be more “staggering” going forward in that we are just starting to see the global inventory decline accelerate. They also agree with my assessment that “the macroeconomic landscape has so far won against the fundamentals, but we don’t think this will persist any longer.”
Refiners are going to have to ramp up globally and while demand growth may indeed slow, it is still on track to be at record highs. Add to that the displaced barrels of Ultra-low sulfur diesel that are now going to power ships instead of planes, trains, and automobiles, and even raise gasoline prices, which will make it more expensive to get home for Thanksgiving.
Reuters reports that those barrels are already moving. They write “Stockpiles of low-Sulphur marine fuels held in floating storage around the Singapore trading and pricing hub are steadily growing ahead of a 2020 global deadline for rules that have shaken the global oil refining and shipping industries. A total of 32 ships, mostly supertanker capable of carrying 300,000 tons or more of oil, are currently anchored in Malaysian waters near Singapore accumulating stores of IMO-compliant fuels on board, according to data released by intelligence firm Kpler on Thursday. Kpler estimates total fuel oil floating storage at 5.765 million tons and a total of 4.455 million tons of compliant fuel oil in floating storage.”
The barrels would be elsewhere but now refiners have a big challenge. To meet demand at a time when Incentives are tightening and ahead of another potential production cut by the OPEC cartel.
The oil market will also look at the plunging U.S. rig count this afternoon. The plunging trend of falling U.S. rigs reflects the lack of profitability by many U.S. shale firms. Banks are not very friendly to lending money and many are saying that this shale cash squeeze will ultimately force the Energy Information Administration to reduce its lofty production forecast. On the positive side, there are reports that the North Sea buzzard production will restart this weekend.
Russia is following in the steps of Saddam Hussein in Iraq and Giselle Bündchen and now wants to be paid in Euros instead of dollars for its oil. Reuters reports that “Russia’s largest oil company Rosneft (ROSN.MM) has fully switched the currency of its contracts to Euros from U.S. dollars in a move to shield its transactions from the U.S. sanctions, Chief Executive Igor Sechin said on Thursday.”
Yet, at least Russian President Vladimir Putin has Syria, but now what is he going to do with it? In a Bloomberg News opinion piece, the writer suggests that despite all the criticism about Trump pulling out of Syria, he may have actually outsmarted Mr. Putin with the Syrian retreat. Now Russia is going to be caught between Turkey and Syria.
Zev Chafets wrote that “Trump calls Syria a “bloody sandbox.” He’s right about that. It is also a briar patch of warring tribes and sects, inexplicable ancient animosities and irreconcilable differences.
“The president is not prepared to take responsibility for this complicated place, or to get caught up in it. If leaving creates an opportunity for Russia to fill the vacuum, as American lawmakers believe, then it is one Trump is happy to cede. The Russian leader struts on the world stage, but he has not exactly won a victory.
“Sooner or later, al-Qaeda, Islamic State or the next iteration of jihad will break loose in Syria. When that happens, the Russians will be the new Satan on the block. Their diplomats in Damascus will come under attack, as will Russian troops. More troops will be sent to defend them. Putin’s much-prized Mediterranean naval installations will require reinforcement. And so on. Soon enough, jihad will inflame Russia’s large Muslim population. Moscow itself will become a terrorist target.
“The “safety zone” that Putin and Turkish President Recep Tayyip Erdogan have recently carved from northern Syria will collapse. Syrian leader Bashar al-Assad rightly considers it a violation of his country’s sovereignty, and if he can persuade his Russian patrons to shut down the zone, Erdogan will threaten another invasion. If Putin then sides with Turkey, Assad will take matters into his own hands. His army may not be fit for fighting armed opponents, but the Kurds are and can act as Assad’s proxies.
“If and when such a border fight develops, Putin will find himself between Assad and Erdogan. Whatever he does, he will wind up in that most vulnerable of Middle Eastern positions, the friend of somebody’s enemy.” A great read.
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