Matter of Time. The Energy Report 01/12/2024

I guess it was just a matter of time until the US and the UK were forced to respond to the Iranian backed Houthi rebels acts of war. The US and UK attacked Houthi rebel strongholds in Yemen in response to Red Sea attacks causing oil prices to break out of their wedge, challenging the upward Bollinger ban as the geopolitical risk factors start to boil over. We are also getting an 8 cent plus spike in RBOB gasoline prices and that means that we will most likely see another jump at the pump. Ultra Low sulfur diesel is up close to 11 cents getting a boost not just from geo-political risk but what could be some record breaking cold.

The attacks are already impacting oil transport as Shipping Data reports that at least four oil tankers have already diverted course from the Red Sea following US/UK strikes in Yemen. Tanker owner Torm has said they will pause all transits through the southern Red Sea. The military advises ships to avoid Bab El-Mandeb straight.

The Iranian backed Houthi Rebel group that was branded a terrorist organization by the Trump administration before the Biden administration reversed it in is desperate attempts to appease the Iranian regime, is now threatening US and UK interests by saying we are legitimate targets. A military spokesperson for the Houthis is saying, “We will continue to obstruct Israeli ships or other ships going to Israel from passing through the Red Sea and Arabian Sea. We won’t hesitate to attack source of threat. US-British attack will not go without a response or punishment.

The rise of the power and might of the Houthi rebels has been bought and paid for with Iranian oil revenue which has surged after the Biden administration failed to enforce sanctions. There are also rumors that the attack came after and alleged attack on the US embassy in Iraq. The Biden administration seemed to hide news that the embassy was attacked in Iraq though that’s yet to be confirmed. The Jerusalem Post reported that, “Sirens were heard at the US Embassy in Iraq Thursday night, according to reports on social media. Reports of a bomb, shared at about 02:00 Israel time in The Jerusalem Post’s sister publication Maariv, could not be confirmed as of later that night and appear to have been unsubstantiated.  The reports came after the US and Britain struck dozens of targets across Yemen, according to some reports, ranging from training bases to drone facilities.”

The risk to supply is coming as the weak demand narrative is starting to unravel. Not only are we seeing more calls for record breaking oil demand, Reuters is reporting that demand for oil in China may not be so bad after all. They reported that China’s annual crude oil imports hit an all-time high in 2023, customs data showed on Friday, as fuel demand recovered from a pandemic-induced slump despite economic headwinds.

China imported 11% more crude oil last year versus 2022 at 563.99 million metric tons, equivalent to 11.28 million barrels per day (bpd), up from a previous record of 10.81 million bpd in 2020, data from the General Administration of Customs showed.

We always have to be cautious of these headlines related oil price spikes. The reality is that the market is still probably undervalued based upon supply and demand. While we could see a pullback, we would definitely recommend buying breaks. We hope that many people locked in their hedges during the markets recent crash. It’s very possible that if we hold on to these gains today and through the extended Martin Luther King holiday weekend that we may have finally confirmed a bottom.

Gasoline and diesel buyers may want to buy early today because prices will start to spike. On top of that we get the grain report. The US world supply and demand agriculture report. That market has a huge hedge fund short position so it’s going to be interesting to watch if oil stays strong that could support grains as well.

Natural gas prices are also higher. Natural gas demand is likely to hit during this cold snap. I expect to see reports of well freeze off and production most likely will fall. We could see record-breaking drawdowns in inventory especially if the cold weather decides to stay around for a while. Late day weather forecast may be key if forecasters start to agree on a colder late January early February. Then natural gas prices could have a long way to go. If not and if we warm up after the cold, then the market will more than likely resume its downtrend.

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