Thunderstruck. The Energy Report 10/02/2024

Record oil shorts seemed thunderstruck that the rising threat of a direct conflict between Iran and Israel could impact oil prices in a world where demand is at record highs and supplies are tightening. The wake-up call and oil realty check came to short sellers after Iran unleashed the largest ballistic missile attack against Israel in history. The Wall Street Journal reported that many the missiles were intercepted but there were impacts in central and southern Israel, officials said. Health authorities there reported no deaths and only minor injuries with the help of the US. Yet this raises the stakes and the risk to global oil supply.

Prime Minister of Israel Benjamin “Bibi” Netanyahu said Iran made a big mistake and ‘will pay’. Israel in the past has warned Iran that any attack on Israeli soil would be met by Israel with attack on their nuclear facilities and or their oil producing and refining capabilities.

The Iranian attack overshadowed the bearish factors for oil such as the Longshoreman’s port strike and reports that Saudi Arabia warns of $50 a barrel oil and supposedly hinted that if OPEC overproducers did not adhere to production targets, they might increase crude volumes to teach them a lesson.

Yet the company the oil market has been historic as the market ignored rapidly tightening oil supplies. The argument that demand from China has been slow to be tempered by the massive stimulus package in China and the fact that the Chinese stock market has had one of the biggest price explosions since the 2008 financial crisis.

The latest data from the American Petroleum Institute showed yet another drawdown in US oil supply as they reported the crude supply last week fell by 1.451 million barrels continuing the US supply drain. Diesel supply fell by a more than expected 2.666 million barrels and gas supply eked out a slight 909,000-barrel increase. Yet hedge-funds downplayed any real risk to oil supply and had a pessimistic outlook on demand even as report after report seemed to suggest that that pessimism was unwanted. Short sellers in Brent crude oil exceeded longs for the first time in recorded history while us oil inventories in the Cushing, Oklahoma delivery point near multi-year lows and Gulf Coast refiners were paying a premium to the WTI futures for supply.

Now with the rising risk of war it makes some wonder about the wisdom of drawing down the Strategic Petroleum Reserve to near a 40-year low. Oh sure, they are starting to buy oil back for the reserve but fail to have the money to bring back the reserve to its former glory, reducing its effectiveness as a deterrent or its ability to respond to an emergency.

Now we’ll wait for response by Israel that has effectively destroyed much of Hezbollah’s capabilities and attacking Israel they say they thwarted another attack on their country by their aggressive actions against Hezbollah and warn that they will respond to Iran’s aggression on their country. Iran’s missile attack on Israel was over barring further provocation, they also said that any Israeli response to the attack, would be met with “vast destruction”. The Wall Street Journal said Israel’s military signaled it would retaliate, though it didn’t provide details of how or when it would respond.

The Wall Street Journal (WSJ) also is reporting news that Saudi Arabia may be close to starting a production war. The WSJ wrote, “The Saudi oil minister has said that prices could drop to as low as $50 per barrel if so-called cheaters within OPEC+ don’t stick to agreed-upon production limits, according to delegates in the cartel. The statements were interpreted by other producers as a veiled threat from the kingdom that it is willing to launch a price war to keep its market share if other countries don’t abide by the group’s agreements, they said. Key members of an alliance made of the Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, are set to discuss whether to ease production curbs in December at a scheduled online gathering Wednesday.”

I agree that Saudi Arabia is showing a little bit of frustration with the OPEC cheaters, but we are seeing better signs of compliance. I don’t think that this talk was a veil threat to increased production but obviously if the cheaters like Iraq don’t rein in overproducing, then maybe the Saudis will raise output. At this point I think that would be unwise because the supply and demand fundamentals should start to turn these prices and if we see a disruption in Iranian supplies, which is increasingly likely, we could see a massive turn around and need more production anyway.

As far as OPEC tension…Amena Bakr reporting from the Gulf Intelligence Energy Markets Forum in Fujairah show the United Arab Emirates agreed with Saudi Arabia that they will see and should see better compliance to production cuts. UAE Minister of Energy & Infrastructure Suhail Al Mazrouei said that “OPEC plus + countries are trying to balance supply and demand as much as possible, we are not perfect, but imagine the world without this group, we would be in chaos.

Well, I think the world is in chaos. Partly because of terrible short sighted energy policy in the US.

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