Crude: Insane and ridiculous

April 25, 2018 07:31 AM
Daily Energy Market Analysis

President Trump has said the Iran Nuclear deal was insane and ridiculous, yet that does not necessarily mean that he is going to back out of it. That possibility helped break oil from near a three-and-a-half-year high that had rallied, in part, on threats by Iranian President Hassan Rouhani, who warned of "severe consequences" if the Trump Administration "betrays the deal."

In a press conference with French Emmanuel Macron, Trump warned Iran that "If they restart their nuclear program, they will have bigger problems than they had before.” Yet, at the same time, the President seemed to wave an olive branch; despite calling it a terrible deal in deference to the French President, who seemed to be suggesting that there was a way to save the deal, which President Trump did not dismiss out of hand. Macron proposed a three-point plan to save and modify the Iran nuclear deal, and Trump said that France and the United States could maybe close that deal quickly. Still, the possibility that the United States will not pull out of the deal reduced the risk premium for oil causing a sell-off along with a sudden spooked U.S. stock market.   

What was also insane and ridiculous was the stock market’s reaction to a 3% yield. The market that has been praying for an economy that was strong enough to raise rates now somehow fears that a 3% yield is not a good thing, which really is insane and ridiculous. Earnings from 3M and a weak outlook from Caterpillar hurt market sentiment, yet companies should adjust to a growing global economy. 

That growing global economy is driving global crude oil demand. Asian oil demand is surging as trade data from Thomson Reuters Eikon shows seaborne imports of crude oil by Asia's main buyers will hit a record in April, importing more than 9 million barrels per day (bpd) of crude. U.S. demand is also at records and we are seeing it impact supply. April gasoline demand is a U.S. record and we saw some strong data from the API. While the API reported a +1.099-million-barrel increase in overall crude supply. Strong gas demand led to 2.724 million barrels drop in gas oil supply. Distillates also fell by 1.911 million barrels as demand is rising, and in the Cushing, Okla., delivery hub supply fell by 930.000 barrels.

Shale oil is rising but even that can’t catch up with rising demand. Bloomberg News Jessica Summers and Sheela Tobben reports that “The Permian shale play is all about setting records. Now, the region may even become the world’s largest oil patch over the next decade. Output in the basin is forecast to reach 3.18 million barrels a day in May, according to the Energy Information Administration. That’s the highest since the agency began compiling records in 2007. By 2023, the basin may produce 4 million barrels a day, according to the International Energy Agency. The Ghawar field in Saudi Arabia is currently the world’s biggest oil field, with capacity of 5.8 million barrels a day, according to a 2017 EIA report.”

This is all thanks to the size of the oil deposits, coupled with increased technology and efficiencies. “The technology is the biggest driver,” said Rob Thummel, managing director at Tortoise, which handles $16 billion in energy-related assets. The basin in and of itself could end up being the largest oil field in the world, even bigger than Ghawar in Saudi Arabia.

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.