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
Oil prices are in pre-holiday meltdown mode on more signs that an Iranian nuclear deal might happen and more Chinese covid lockdowns. There are reports on Tuesday from the Iranian news service that quoted a source from the International Atomic Energy Agency that said an Iranian nuclear deal was close but was later discounted by an unnamed state department source. Yet yesterday the Biden administration acknowledged that Biden called the Israeli Prime Minister Yair Lapid to discuss the deal.
We do know that Israel has been dead set against the proposed Iranian nuclear deal. The only thing we heard about the phone call was that both Biden and the Prime Minister were committed to not allowing Iran to ever get a nuclear weapon. Still, the disagreement might be how they go about that. Biden wants to use the fraud 2015 nuclear deal with the hopes that Iran will comply with Prime Minister Lipidit, of course, is more realistic, and understands it’s probably going to take a lot more persuasion to stop Iran’s errors in the region and their quest to get nuclear weapons. Overnight French President Emmanuel Macron also signaled that he thought the Iranian nuclear deal was close and hoped it could be completed.
The oil market also is considering more aggressive lockdowns in China that could impact demand in the future. Reuters is reporting that, “The southwestern Chinese metropolis of Chengdu announced a lockdown of its 21.2 million residents as it launched four days of citywide COVID-19 testing, as some of the country’s most populous and economically important cities battle outbreaks. Residents of Chengdu, the capital of Sichuan province, were ordered to stay home from 6 p.m. on Thursday, with households allowed to send one person per day to shop for necessities, the city government said in a statement according to Reuters.”
Oil prices are also getting pressure from a weak technical picture and the fact that we’re going into a three-day holiday weekend in the United States. Oil notoriously sells off going into these three-day holidays weekends as its volume becomes lighter and the path of least resistance seems to be towards the downside. Still, in the big picture demand, it’s not as bad as people have been previously reporting. Supplies around the globe are dangerously tight.
One question has been. If oil demand was so bad, why has supply been falling so hard? The answer is that demand was never that bad. The Energy Information Administration (EIA) upped its demand estimates increasing its oil demand numbers by a whopping 740,000 barrels a day in its monthly report for June.
In its weekly data, it shows that current inventories are too far below average to feel comfortable going into winter. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.3 million barrels from the previous week. At 418.3 million barrels, U.S. crude oil inventories are about 6% below the five-year average for this time of year. Total motor gasoline inventories decreased by 1.2 million barrels from last week and are about 7% below the five-year average for this time of year. Finished gasoline inventories increased, but blending components inventories decreased last week. Distillate fuel inventories increased by 0.1 million barrels last week and are about 23% below the five-year average for this time of year. Propane/propylene inventories increased by 4.2 million barrels from last week and are about 8% below the five-year average for this time of year. Total commercial petroleum inventories decreased by 0.2 million barrels last week.
As you can see in all major categories, supplies are below average. The EIA has been underestimating demand and that is keeping the market vulnerable for more downside-upside action. In the short term there is no doubt that we’re seeing technical pressures because of fears of rising interest rates, China locked down and a potential Iranian nuclear deal. We expect strong support near the lower Bollinger band around 8564. We should start building a base in that area. We do have an Iran Nuke deal risk that may cause a sharp 10-a-barrel drop but that should be short-lived and would most likely be the capitulated bottom.
What is also clear is that OPEC is laying the groundwork for a production cut if not at this meeting then very clearly at their next meeting. OPEC has already made it clear that if Iranian oil is allowed back on the market that they would adjust their production to not tank the price of oil on top of that we believe that the predictions that Iran could add 1 to 2 million barrels of oil a day to be overly optimistic. The bigger concern is the oil that they hold in storage but none of that matters because of market is going to react negatively to a deal at least initially and so they realize that it’s not going to add that much oil to a market that is already undersupplied.
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