As the oil market turns

August 27, 2018 08:21 AM

Crude oil is being driven by more plotlines than an afternoon soap opera. With upcoming sanctions on Iran, the Fed on pace for gradual interest rate increases, strikes in the North Sea and a big drop in the U.S. oil rig count (which fell by 9 rigs, the biggest drop since May of 201), there is enough drama for both the bulls and the bears. The U.S.-China trade dispute, as well as the possibility that the United States might get a deal on NAFTA, is pulling the trade in different directions. Nafta crude oil refers to the distillation product from coal tar and petroleum that contain certain hydrocarbons.

Yet, behind the drama is the fact that global oil demand continues to increase by more than most expectations, and unless the economy hits a major setback we are on a path of the market being undersupplied. While we expect that oil supply and products will rise this week--crude by 2 million barrels, gas by 2.5 million and distillates by 2 million barrels--we see the bigger picture of a global oil marketplace that will have little or no spare production capacity left over.

Iran has accused some members of the cartel of doing the bidding of the United States. Reuters reported that Iran’s Khaneye Mellat news agency reported on Friday that Iranian Oil Minister Bijan Zanganeh said some members of oil producer group OPEC were acting in accordance with U.S. policies.

OPEC and Non-OPEC are going to try to set the stage for their joint Ministerial Monitoring Committee, which will meet in Algeria on Sept. 23, which will be chaired by Saudi Arabia and includes OPEC members Algeria, Kuwait, UAE and Venezuela, as well as non-OPEC members Oman and Russia. They have a call tomorrow and the big issue will be how to handle the Iranian sanctions. Kuwaiti Oil Minister Bakhit al-Rashidi said that they will agree on a mechanism to monitor its crude production before the end of the year.

Reuters is reporting that Iranian lawyers will ask the International Court of Justice on Monday to order the United States to lift sanctions ordered by the Trump Administration against Tehran. The lawsuit filed with the ICJ, also known as the World Court, says the U.S. sanctions, which are damaging its already weak economy, violate terms of a little-known 1955 friendship treaty between the two countries. The United States, which will respond formally in oral arguments on Tuesday, has yet to issue a public response. U.S. lawyers are expected to argue that the United Nation’s court should not have jurisdiction in the dispute, that the friendship treaty is no longer valid and that the sanctions Washington has levied against Tehran do not violate it anyway. The oral hearings, essentially a request by Iran for a provisional ruling, will last for four days, with a decision to follow within a month.

Reuters is also reporting that Saudi Arabia is moving ahead with economic reforms and growth in its non-oil economy will pick up this year despite any delay to a planned sale of shares in national oil giant Saudi Aramco, a senior International Monetary Fund official said on Friday. IMF urges Saudi Arabia to contain spending despite oil price rise, the organization says a rise in spending would expose the Saudi budget if there was an unexpected drop in oil prices. 

Oil Price is reporting that gulf coast oil product cargoes are being diverted to Brazil after a fire at Petrobras Refinery. Bloomberg reported that China Petroleum & Chemical Corp. raised its dividend payout after half-year earnings jumped to a record, fueled by improving refining profits and a rebound in crude prices that brought its oil and gas exploration unit closer to breaking even. The world’s biggest refiner by capacity, known as Sinopec, proposed an interim dividend of 0.16 yuan a share, a 60% increase from the previous year, it said Sundayin stock exchange filings. Net income rose 52% to 42.4 billion yuan ($6.2 billion) in the first six months. That’s the best half-year profit on record, according to data compiled by Bloomberg dating back to 2000.

John Kemp, of Reuters, reports that hedge funds cut combined net long position in six major petroleum contracts by -49 million bbl. to 903 million bbl. in the week to Aug 21 (longs -36mn, shorts +12mn). This came as the market surged at the end of week. We like to look of oil. We think the lows are in.

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.