Crude's new balance

July 28, 2017 09:29 AM
Daily Energy Market Analysis

Crude oil prices must find new balance as global oil stock piles are falling against surging global demand and an increasing amount of geopolitical risk. Russia and Venezuela are the hot issues, with Iran and North Korea lurking in the background.

Sanctions on Venezuela may at one-point rattle U.S. domestic gasoline prices even as US refiners try to reduce their dependence on heavy crude. The late Hugo Chavez’s former puppet Venezuelan President Nicolás Maduro, is calling a vote to change the constitution so he can hang onto power. The Trump administration sanctioned 13 current or former Venezuela officials, but not oil exports, to save the Venezuelan people from this hijacking of what is left of its democracy. U.S. imports of Venezuelan crude fell 32% in June to a 13-year low of 491,000 barrels per day, according to Reuters data. PDVSA's exports have declined this year as production and shipping problems cut its ability to meet commitments.

Still, if there is a total cutoff of Venezuela crude, U.S. refiners will feel the pinch and we could see a gas price spike in the United States.

U.S. shale condensate is too light for refiners and must be mixed with heavy but many are trying to max out their mix. U.S. heavy prices have been on the rise as reduced OPEC imports, mainly from Saudi Ariba and OPEC, have left the heavy market tighter. While there is an abundance of light crude in storage, the supply of heavy is around a 30-days and a cut of Venezuelan crude would have some refiners scrambling. That could send gas prices up 10 to 25 cents a gallon.

Russia is reacting to US sanctions for their alleged role in trying to influence U.S. elections and Russia has reacted by seizing a U.S. dacha compound and warehouse used by U.S. diplomats in retaliation for new U.S. sanctions against Moscow and ordering the United States to reduce its Russian diplomatic staff. The Russian Foreign Ministry also warned the United States it would respond in kind if Washington decided to expel any Russian diplomats, according to Reuters.

Missile mania. If it's not North Korea, it’s Iran. Iran launched a space satellite that the U.S. State Department said was a “provocative action” that violated a UN resolution on ballistic missiles and violated the spirit of the UN nuclear deal. North Korea threatened yesterday to annihilate the United States with “merciless" missile strikes. So just in case, make sure you really enjoy this weekend. Stay tuned.

The bottom line is the market cannot ignore falling global oil stocks and rising demand. Global stocks have fallen close to 83 million barrels of oil since March according to Goldman Sachs and our sources say that number could be even higher. The market has had it wrong that OPEC cuts and low prices would not reduce supply and that means we will still have a significant rally this year. The rally was delayed by false assumptions about demand and supply but those assumptions have proven to be wrong by recent data. Now with the potential of a shale oil pullback, the market could tighten even faster because shale is slow to ramp down and slow to ramp back up. The U.S. rig count today may give us a sign about how big the shale pullback might be.

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.