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
Iran says it is finally ready for direct negotiations with the European participants to the 2015 nuclear deal. Oh, joy. Iran has continued to stonewall inspectors from the International Atomic Energy Agency, selling black market oil to China and attacking a US base in Syria. Now it seems that they are ready to settle down and talk and beg for freebies from The Joint Comprehensive Plan of Action (JCPOA).
Of course, Iran right now does not have a lot of incentive to get back into a nuclear deal because everything seems to be going their way. The price of oil is up, they can skirt U.S. sanctions and they’re able to continue to proliferate their nuclear activities. Yet if they go to talks, they can get free dinners and pretend like they are interested in making a deal so the so-called “plan b” of the Biden administration does not go into effect. If they can keep them talking, they can continue the spread their errors throughout the world without any fears of reprisals.
In the meantime, here in the United States, the focus is on the Cushing, Oklahoma oil delivery point, which if the American Petroleum Institute (API) is correct, saw another substantial drawdown. Oil prices are a little bit weaker because they’re a bit concerned about the technical setup of the market. We are overbought and the fact that crude supplies were able to build despite the drawdowns in Cushing, OK. Keep in mind that we are releasing oil from the strategic petroleum reserve. That is making the crude number look a little bit bigger. If you look at the overall inventories they’re still very tight. The API posted a 2.318 million barrel build despite a massive 3.734 million barrel drawdown at the Cushing, Oklahoma delivery point. People are going to continue to watch the front end spread in the West Texas Intermediate, that’s going to be an indication that if things don’t change it will only be a matter of weeks before Cushing, OK runs dry and that’s going to create some very interesting scenarios for the delivery of the December futures contract.
The API showed some surprising increases in products. The API reported that gasoline inventories rose by 530,000 barrels. They reported that distillates rose by 986,000 barrels. Just looking at the report overall it seems like something’s out of whack. Perhaps the Energy Information Administration report today at 9:30a will shed more light on a situation that is looking more direr especially in the front end of the curve.
John Kemp at Reuters points out that U.S. oil stocks at the delivery point have fallen to the lowest seasonal level since 2018 and before 2014. As tanks empty, WTI’s six-month calendar spread has flared out to a backwardation of more than $6/bbl, in the 99th percentile for all trading days since 1990.
We have had a long-term upward target for oil of $88 a barrel and while we have been very bullish this entire year on the price of oil, we never thought that we would see $100 a barrel this year. Right now the market is looking technically overbought but it has looked overbought for a while so we’re cautious for a bit of a correction. If the outside markets start to falter, the overall fundamentals are very bullish and a lot of things that we predicted would happen years ago have come true fruition. The underinvestment in oil which goes before the covid crisis and the bad decisions made by Europe regarding lowering their carbon emissions has proven to be the disaster that we said it would be.
Natural gas had a wild day on the November Option Expiration. The $600 calls had some hope that was dashed yet the outlook for natural gas is still bullish. EBW analytics says that a bullish weather shift over the weekend sparked a furious rally heading into the November natural gas contract’s final settlement, with further fireworks possible on Wednesday. Even after the transition away from extreme October warmth, however, the November outlook remains mild vs. normal. Inconsistent LNG, risks of rising gas production, and a tumbling storage deficit pose further obstacles for natural gas bulls.
By mid-to-late November, a more durable cold outlook appears likely, fueled by cold air supply in western Canada. From Thanksgiving through the end of December, the storage deficit vs. the five-year average could triple and individual cold outbreaks could quickly restore natural gas winter risk premiums. Nonetheless, early-winter risk premiums are often unsustainable in all but the coldest scenarios—posing significant downside price risks for February and March 2022 natural gas contracts.
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