The Phil Flynn Energy Report 9/13/19

In the Interim

What is the best way for the global oil market to handle the potential return of Iranian oil supply? The best way would be to cut a deal with China.

Oil prices which have been under pressure all week as the removal of John Bolton from as National Security Advisor increased the odds that the Trump administration will lift some sanctions on Iran and release Iranian oil supply back onto the market. This would come at a time when The Energy Information Administration, The International Energy Agency and OPEC all are raising concerns about global oil demand growth. Yet at the same time, all of those forecasts assume that the U.S./China trade war will go on indefinitely. Yet a Bloomberg report that the Trump administration was considering a so called “interim trade deal” with China changed the oil market fortunes. It turned around and railed until a White House official said “absolutely not” but rallied later after President Trump said he would consider an interim trade deal with China but would prefer to get the whole ball of wax, so to speak.

The bullish impact of a trade deal with China would offset the bearish impact of the return of Iranian supply. Despite all of the talk of slowing demand growth, the reality is the crude market is in tight supply. U.S. oil supply is now 4% below the five-year average and in Europe and globally, supplies are falling as well. Instead of a glut that many predicted would have already happened, we have a tightening of supply. A U.S./China trade deal would put the market in a deficit. China already is responding positively by removing tariffs on soybeans and pork.

Maybe that is why OPEC punted on an additional OPEC plus one cut. Instead of a cut, they instead stressed compliance. The group, led by the new Saudi Energy Minister Abdulaziz bin Salman, said at the opening session of the meeting according to reports that, “Every country counts regardless of its size” and should pull its weight. Recent reports have Russia Iran and Nigeria over producing by about 600,000 barrels a day.

Some traders thought the cartel would try to shock and awe the market with a cut at the joint OPEC/non-OPEC Ministerial Monitoring Committee (JMMC) in Abu-Dhabi yesterday. Yet that would have been too dangerous to use that weapon now because of the increasing chances that Iran’s oil might be coming back. So the cartel may have thought that it is best to wait to announce that cut, if and when sanctions on Iranian oil are lifted. The cartel did suggest they would consider an additional production cut at the December meeting. Besides, if the U.S./China trade deal is sealed, they may have to raise production, not cut.

Reuters though gave the new Saudi Oil Minister high marks. Reuters said that while, “OPEC is notorious for arguing over production policies – but Prince Abdulaziz bin Salman has effectively managed to deliver his first output cut just four days after becoming the new Saudi energy minister. The prince, a veteran oil official and senior member of the Al Saud ruling family, is expected to deal with OPEC matters differently from his predecessor Khalid al-Falih, according to three sources, who were briefed on the discussions. Falih has repeatedly upset other OPEC producers by forging deals with non-OPEC/Russia first without discussing them with the kingdom’s Gulf OPEC allies, who traditionally cut or raised output together with Riyadh. “The new minister likes decisions to be unanimous instead of being presented as just Saudi-Russian agreements,” one source told Reuters. “He wants us to be a united front.”

U.S. natural gas production is on fire. The Energy Information Administration reported that U.S. natural gas production continued to increase in August, setting a new daily production record of 92.8 billion cubic feet per day (Bcf/d) on August 19, 2019, according to estimates from IHS Markit. Natural gas production also set a new monthly record in August, averaging more than 91 Bcf/d for the first time. Yet the weekly data was bullish. The EIA reported that, “Working gas in storage was 3,019 Bcf as of Friday, September 6, 2019, according to EIA estimates. This represents a net increase of 78 Bcf from the previous week. Stocks were 393 Bcf higher than last year at this time and 77 Bcf below the five-year average of 3,096 Bcf. At 3,019 Bcf, total working gas is within the five-year historical range.”

Now we have to watch the weather. Another storm, tropical Cyclone Number 9, is in the Atlantic which sadly may be taking the same path as Hurricane Dorian. The Orlando Sentinel reports that a tropical storm watch was put into effect for Central Florida while Tropical Storm Humberto is expected to form by Saturday morning as the system moves up the east coast, National Hurricane Center forecasters said Friday morning. “Potential Tropical Cyclone Nine” was located about 255 miles southeast of Freeport, Bahamas, and is gaining speed while moving northwest at 6 mph, the hurricane center said in its 5 a.m. Friday update.

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Phil Flynn
The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network