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
A flash crash in the gold and oil market retested lows as covid travel restrictions in China, and rising cases of covid in Thailand and the U.S. is putting a damper on oil demand expectations. A better-than-expected jobs report also is raising odds that the Fed will soon start to taper and interest rate increases may come earlier than previously expected. Yet with U.S. covid cases at a 6-month high and news that Goldman Sachs Group Inc. is downgrading its economic growth forecast for China, may temper those rate increase fears and may be a reason stocks are doing well even as bond yields rise. Covid fears mixed with some seasonal weakness ahead has been the reason for the weakness even as overall global oil supplies are tight. Well tight for now unless we see more covid shutdowns.
U.S. gasoline demand is staying high even as gas prices hover at $3.19 a gallon national average. It will be interesting to see if covid fears dent gasoline demand at some point. So far it has not.
Bloomberg News reports that, “The Biden administration faces the sobering reality that returning to the Iran nuclear deal may no longer be feasible, as the Islamic Republic finds ways to cope with U.S. sanctions and races toward the capacity to build a bomb. U.S. officials are reviewing their options after months of talks on reentry into the accord failed to produce an agreement, according to people familiar with the discussions. Although still calling for a quick return to the pact as a pathway toward a “longer and stronger” deal, the U.S. is willing to weigh alternatives, including the interim step of limited sanctions relief in exchange for Iran freezing its most provocative proliferation work, they said.
Bloomberg says, “that prospect is partly a response to heightened tensions with the election and last week’s inauguration of Iran’s new hard-line president, Ebrahim Raisi, and a spate of provocative incidents including rocket strikes on Israel by Iran-backed Hezbollah militants and the attack on an oil tanker off the coast of Oman. Iran has denied responsibility for the strike on the HV Mercer Street, which killed a Romanian and a British citizen and added to jitters in oil markets.
Failing to return to the original deal would mark a significant setback for Biden, who had ranked revival of the multinational accord as a top foreign policy priority and a key to his plans for the Middle East, despite protests from allies such as Israel and Gulf nations including Saudi Arabia and Bahrain. Former President Donald Trump quit the pact, imposing limits on Iran’s nuclear program in exchange for sanctions relief in 2018. Six rounds of talks in Vienna since Biden took office have made little headway. There’s no date set for a seventh.
At this point we don’t know how much is fear and the reality is, the crude oil market is near its previous low near $65.00 a barrel. There should be pretty good support here but the mood is still negative. The market is trading more on what we don’t know at this point. What we do not know is how bad the covid delta variant is and we don’t know how it will impact demand. China National Petroleum predicted that oil demand in China would fall by 5% because of the covid lockdowns but could that number be bigger if the lockdowns are expanded. That’s one of the things we do not know.
We also do not know whether or not this delta variant is going to impact U.S. demand. So far it really hasn’t but we’re just starting to see the impact. We do know that some companies are delaying back to the office mandates but the likelihood of a major shutdown like we had a year ago is very unlikely. We think that at some point the oil market should bottom and start to come back up but we’re not necessarily in the mood to be a hero right now. Still, it might be a good time to pick up some cheap calls or put on bullish strategies.
Natural gas is at a 31 month high as heat blankets much of the heartland. Andrew Weisman of EBW Analytics says that over the weekend, this week’s forecast trended even hotter, and the mid-August outlook recovered some of its losses, with total CDDs now predicted to be above seasonal norms through the end of the 15-day window. If this forecast verifies, further gains are likely for NYMEX gas.
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