Standing Ground
Oil is holding its ground, shaking off a surprise crude oil supply increase against a backdrop of rising geopolitical risk. Most of the talk lately has surrounded Trump’s refusal to extend sanctions waivers to buyers of Iranian crude oil, but you also have continued fighting in Libya putting those supplies at risk as well as plummeting output from Venezuela. Did you forget about Venezuela?
According to the AP ”The Energy Information Administration said that Venezuela, the sole OPEC member in the Western Hemisphere, has lost about 100,000 barrels a day in production since February due to Trump administration sanctions. That means that annual production will be hard to make up, and the shortfall will likely place upward pressure on oil prices as new U.S. sanctions on Iranian oil imports kick in.”
You also have very strong gasoline demand despite a slight weekly drop. Supply of gasoline and distillates are below average for this time of year. Refiners are going to be forced to ramp up production to keep up with what will be near record gas and diesel demand this summer.
The Energy Information Administration (EIA) reported that U.S. crude stocks increased by 5.5 million barrels last week, putting oil inventories back to 460 million barrels for the first time since 2017. Still, despite the big increase, supplies for this time of year are still just at the five-year average. Gas and distillate stocks on the other hand, are below the five-year average and unless your car runs on crude oil, that is a bit of a problem.
The EIA reported that total motor gasoline inventories decreased by 2.1 million barrels last week and are about 2% below the five-year average for this time of year. Distillate fuel inventories decreased by 0.7 million barrels last week and are about 6% below the five-year average for this time. While week over week gasoline demand dropped, it is still very solid, and it shows that consumers are showing little impact from rising gasoline prices so far.
Beyond the inventory data, the petroleum sector is gaining support from tough talk out of Iran regarding Trump’s decision to economically bury the country. Reuters reported that “Iran will continue to find buyers for its oil and use the Strait of Hormuz to transport it,” the country's Foreign Minister Mohammad Javad Zarif said on Wednesday. “We believe that Iran will continue to sell its oil. We will continue to find buyers for our oil, and we will continue to use the Strait of Hormuz as a safe transit passage for the sale of our oil," Zarif also told an event at the Asia Society in New York. "If the United States takes the crazy measure of trying to prevent us from doing that, then it should be prepared for the consequences," he said, without giving specifics. According to the Reuters report.
It appears that sanctions on Iran are already starting to work though. The Wall Street Journal reports “Asian companies that had provided a lifeline to Iran after the U.S. reimpose sanctions last year are pulling back, hurting the hobbled Iranian economy and leaving the Islamic Republic with less incentive to stay committed to a multination nuclear deal”, Western diplomats say.
“The companies are reacting to the Trump administration’s moves this month to squeeze Iran’s oil exports and impose a terror designation on its paramilitary force. Among Asian businesses rethinking their dealings with Iran are banks, oil companies and technology giants including Huawei Technologies Co., Lenovo Group , LG Electronics Inc. and Samsung Electronics (KS:005930) Co.” Many deals between Iran and Chinese companies “are now dead in the water,” said an adviser to a Chinese oil company in Iran. “No one wants to take the risk of going out of business” according to the Wall Street Journal.
Bloomberg News reports that the Trump Administration is thinking of waiving the Jones Act. Bloomberg writes “President Donald Trump is seriously considering waiving the requirement that only U.S.-flagged vessels can move natural gas from American ports to Puerto Rico or the Northeast, according to people familiar with the deliberations”. The issue was debated during an Oval Office meeting on Monday, following requests from Puerto Rico and pressure from oil industry leaders to ease the nearly 100-year-old Jones Act requirements, according to three people. Although top administration officials are divided on the issue, Trump is now leaning in favor of some type of waiver, said two of the people, who asked for anonymity in discussing the private deliberations.
Libya is still hot and may have an impact on oil supply and some think that President Trump is changing sides. Bloomberg News reports that President Donald Trump indicated in a phone call with Libyan strongman Khalifa Haftar last week that the U.S. supported an assault on the country’s capital to depose its United Nations-backed government, according to American officials familiar with the matter. An earlier call from White House National Security Adviser John Bolton also left Haftar with the impression of a U.S. green light for an offensive on Tripoli by his forces, known as the Libyan National Army, according to three diplomats.
Those accounts go beyond a White House statement issued Friday on an April 15 call between Trump and Haftar. The revelation that the U.S. President had tacitly recognized Haftar -- addressed as “field marshal” in the statement -- as a Libyan leader abruptly undermined the country’s internationally-recognized government led by Prime Minister Fayez Al-Sarraj, according to Bloomberg.
Go Ethanol! The EIA reported that the United States exported 112,000 barrels per day (b/d) of fuel ethanol in 2018, surpassing the record high of 91,000 b/d set in 2017. At the same time, U.S. imports of fuel ethanol decreased about 30% in 2018 to less than 4,000 b/d, which resulted in the United States exporting more fuel ethanol than it imported for the ninth year in a row.
The players in the market are very long. Many are betting on a continued price spike as well as a big move up in gasoline. We are still very bullish, but we are ever more concerned about a correction. Normally your first major correction comes closer to Memorial Day. Still, be careful. Besides if you do get a correction it may be a great buying opportunity. Maybe hedge some of your longs with some puts as puts, relatively speaking, look cheap compared to the calls.