What did we just do?

June 27, 2016 08:42 AM
Daily Energy Market Analysis

Regrets? Do they have a few? The hangover continues from the Brexit vote and global markets have a headache. While crude oil is trying to shake off the Brexit shock, it is having a hard time even though the supply and demand fundamentals are much tighter right now than almost anyone could have predicted. With falling U.S. oil output and supply drops from Nigeria, Venezuela--and even Iran last month--the market should be soaring to meet what one would expect to be an undersupplied market. Yet, with Brexit fears causing predictions of a recession, oil is having a hard time staying positive while the outlook is so cloudy.

While the UK is not a major oil consume, the fear is that the fallout from a recession could slow demand in the Eurozone and that demand drop might spread to its major trading partner China. Goldman Sachs said that a 2 percent drop in UK GDP would likely reduce UK oil demand by 1% (16,000 barrels per day), which is a 0.016% hit to global demand. 

In contrast U.S. oil production down close to a million barrels a day from where we were a year ago, got hit with another sign it may fall further. Baker Hughes reported that the U.S. oil rig count fell by 7, stopping in its tracks the two week rebound and dashing hopes that the U.S. shale producer was getting ready to create a surge in production. The U.S. oil rig count is still down 438 rigs from a year ago. Most of the U.S. oil production growth will be in the Gulf of Mexico where most big oil money has been spent.

There are also growing concerns about Iranian oil output. After raining output in spectacular fasion after sanctions were lifted, there seems to be signs that the good times may be over. Bloomberg News reported that Iran's observed crude oil exports, which exceeded 2 million barrels a day in both April and May, slipped by almost 20% in the first three weeks of June.

This comes against a backdrop of concerns about oil production in other oil producing nations. In Nigeria a pipeline attack raised concerns that a ceasefire with Nigerian rebels may not happen even as the government says that talks are continuing. Bloomberg reports that Nigeria’s oil production fell to 1.3 million barrels from from 2.2 million a day, and output was between 1.8 million and 1.9 million as of two days ago.

As for oil until we get a better handle on what the future brings, position trading in the short term will be challenging. In the near term look to use short term market swings to your advantage. Long term we still believe we are at the bottom end of the cycle but the next couple of months will add more volatility.

Natural gas still looks strong as hot temperatures and near record demand is giving it support even as the rest of the complex is under pressure. This comes even as drillers added 4 rigs last week.

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.