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
Hedge funds with their near-record short position still control the market’s direction until proven wrong. The shorts are betting that OPEC won’t have the stomach to add or extend production cuts and believe the US will continue to break new oil production records despite declining rig counts and the disappearance of drilled but uncompleted wells. Hedge funds are also betting that the US won’t have the stomach to enforce sanctions on Iranian oil production and exports or will be able to cut back on Russia’s surging exports. They also have taken out the risk of any supply disruption due to the Israeli war on the terror group Hamas.
History suggests that the hedge fund short trade is on borrowed time as the market is getting extremely oversold and prices are out of whack with what should be fair value based on current supply and demand fundamentals. So, unless the economy hits a brick wall, the risk of a sharp upside reversal is high assuming that the market can break the simple downtrend. Most funds at this point are watching the 10-day moving average of a turning point. The funds successfully forced closes below that point and by doing so kept the computer traders on their side. Now if you look at support in the oversold market, for those who like to catch falling knives, is 7555 area rather than 7320. These areas should be targeted but to inspire a short covering rally we need a close today over 7759.
Still based on Energy Information Administration (EIA) data hedgers should look at this price break as your last best chance to put on winter hedges, and this is particularly important for those that use diesel. Diesel suppliers are at dangerously low levels.
The EIA reported that distillate fuel inventories fell by 1.4 million barrels last week and are still about 13% below the five-year average for this time of year. Based on current supply and demand that number is close to historic lows for this time of year or at least since 1982 and we can’t count on another warm winter to bail out this extremely tight market. While we might get lucky and have a warm winter and maybe the hedge funds can keep the prices low the reality is that if you are a hedger and you do not hedge, you’re taking a significant risk.
We also saw a 1.9-million-barrel crude building in Cushing, Oklahoma. John Kemp at Reuters writes that, “because of that US crude futures are trading in contango for the first two listed months (Dec/Jan and Jan/Feb) as traders become more confident supplies around the NYMEX delivery point at Cushing will be adequate and there will be no further depletion. The first two months are in contango for the first time since the end of June, before Saudi Arabia and its OPEC⁺ partners implemented their additional production cuts.”
The Energy Information Administration also reported after pausing to fix their data that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.6 million barrels from the previous week. At 439.4 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year. Total motor gasoline inventories decreased by 1.5 million barrels from last week and are about 1% below the five-year average for this time of year.
Bearish traders are locked down to the fact that US production, the one change in the weekly report, is still near a record high and they also logged on to the fact that weekly demand for both diesel and gasoline has been down in the last two weeks. Still if you look at a report from JODI Oil Demand at Seasonal Record for 5th Month in Sept. Jodi reported that, “China’s crude imports fell by 1.3 mb/d in September while demand fell by 834 kb/d.
The EIA reported that US demand based on total products supplied over the last four-week period averaged 20.4 million barrels a day, down by 2.0% from the same period last year. Over the past four weeks, motor gasoline products supplied averaged 9.0 million barrels a day, up by 1.9% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels a day over the past four weeks, slightly below the same period last year. Jet fuel product supplied was up 14.0% compared with the same four-week period last year.
Yet the question I am asking, and the world wants to know is, will the world or the US stand up to Iran that is funding Hamas and other terror groups? Bloomberg News reported that, “The US will enforce oil sanctions against Iran amid the renewed conflict in the Middle East, a White House Energy adviser said Wednesday. “We are going to enforce those sanctions,” President Joe Biden’s energy security adviser Amos Hochstein said on Bloomberg Television, in reference to what he said amounted to more than 1 million barrels a day of oil exports from Iran. “Those numbers will come down.” I will not hold my breath.
Also, Iran’s nuclear ambitions seem to be as strong as ever despite the Biden administration’s continued appeasement of the Iranian regime. Reuters reported that, “Iran has enough uranium enriched to up to 60% purity, close to weapons-grade, for three atom bombs by the International Atomic Energy Agency’s definition and is still stonewalling the agency on key issues, confidential IAEA reports showed on Wednesday.
Iran’s stock of uranium enriched to up to 60% grew by 6.7 kg (14.8 pounds) to 128.3 kg (282.9 pounds) since the last report on Sept. 4, one of the two reports to member states seen by Reuters said. That is more than three times the roughly 42 kg (92.6 pounds) that by the IAEA’s definition is theoretically enough, if enriched further, for a nuclear bomb. Weapons grade is around 90% purity.
In the second report issued on Tuesday, the agency said there still had been no progress on two pressing issues in Iran: getting more monitoring equipment re-installed after it was removed at Tehran’s behest last year, and getting answers on the origin of uranium particles found at two undeclared sites. So, remind me again why the Biden administration freed up and handed over another 10 billion dollars for the Iranian regime.
Natural gas is rebounding yet again on the potential for winter weather to show up. We get today the report from the Energy Information Administration. The Wall Street Journal reports that, “Natural inventories likely saw an increase last week as warmer-than-normal weather across the U.S. kept a lid on demand, according to a survey by The Wall Street Journal. The Energy Information Administration is expected to report that gas in storage rose by 34 billion cubic feet in the week ended Nov. 10, according to the average forecast of 11 analysts, brokers, and traders. Estimates range from an increase of 48 Bcf to a decline of 20 Bcf. The expected inventory build follows what was likely a small draw on stocks the previous week when some colder weather pushed up heating demand.
The EIA didn’t release its natural-gas storage report last week because of a system upgrade and is expected to include information for the week ended Nov. 3 on Thursday. Natural gas in underground storage in the lower 48 states stood at 3.78 trillion cubic feet as of Oct. 27, which was 5.7% above the five-year average, according to the EIA.
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