Manic oil market meltdown

May 29, 2018 08:27 AM
Daily Energy Market Analysis

Crude oil prices are still reeling from the threat that OPEC and Russia may raise output and fear that turmoil in Italy could cause larger problems in the Eurozone. This comes as sub-tropical Storm Alberto poured a lot of rain in Florida denting some gasoline demand. While it looks like the first hurdle of getting gasoline supplied by Memorial Day has cleared, the oil market will still be undersupplied even if OPEC and Russia add the amount of oil that they say they will. We should see a return to crude oil supply drops in the U.S. as well as a drop in oil products. Unless the Italy turmoil turns into a Eurozone recession, then the demand curve will be tough to meet as it has grown faster than new supply. 

Timing is everything. OPEC and Russia news saying that they would raise production came at a time when most U.S. traders were on a break. The lack of traders allowed the oil market to react and most likely overreact to the reality of the OPEC cuts. While the talk about the increase could range anywhere from 250,000 barrels a day to as high as 1 million barrels a day, it still would not be enough to replace the loss of Venezuelan and Iranian crude. Venezuela’s production is going to totally collapse and many companies will not want to do business with Iran due to the U.S. sanctions that will be imposed. Even shale production, while on the rise, will be hard-pressed to make a difference as logistical and capital issues will limit how much they can raise output and deliver. If they do increase output it would be the first agreed upon increase since January 2016.

The oil market also must deal with a flight to quality in the dollar. Concerns that Italy may reform a government that may want out of the European Union is shaking up their markets. Italy’s President Sergio Mattarella ended plans to form Western Europe's first populist government by vetoing Paolo Savona as its economic minister. Paolo Savona is someone who has suggested that Italy should leave the EU and the Italian President does not want to send that message. Still, to call for another election is creating fear and there are concerns that this could lead to contagion and ultimately hurt EU’s economic growth. 

It is too early for the heat and too early for tropical storm activity, but it is happening, anyway. Subtropical Storm Alberto made landfall yesterday in the Florida Panhandle. The storm caused canceled plans and cruises and probably cut into some energy demand.

Still, we expect that despite OPEC talk about more output for oil in the future it won’t help us now. We should see three million-barrel drops in both crude and gasoline and a two-million-barrel drop in distillate. U.S. crude supply is below average with above average demand.

The heat will also boost natural gas demand as air conditioners were humming all weekend. It was so hot in Illinois that Memorial Day Parades were called off due to excessive heat. Some roads were buckling due to the sudden heat wave.  

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.