Crude prices are going nuclear as President Donald Trump pulled out of the Iranian nuclear accord creating a new risk dynamic for global oil markets. The decision by president Trump to pull the plug on what he said was a horrible deal comes as global oil demand is rising and the lack of investment in the oil patch is making it difficult for global oil production to keep pace with demand.
Even the fact that the Energy Information Administration raised its 2018 crude oil production estimate to a record 10.72 million barrels a day this year and another record projection of 11.86 million barrels a day next year was not enough to calm the market as the supercycle in oil that we predicted a few years back, is becoming more apparent to the marketplace.
The deal means shale oil producers and U.S. energy companies will win if they did not commit a lot of money to Iran. Even the commitment by Saudi Arabia to help stabilize global oil was not comforting considering that the Saudis want $80 a barrel oil anyway. The UAE also vowed to step in if needed, but the reality is that even with the oil coming out of Iran the global oil market is currently undersupplied as it is.
The Saudis also are forced to shoot down missiles fired from Iranian backed Houthi Iranian rebels. That happened again overnight as the Trump Administration laid out more Irianian misdeeds as its reason for pulling out of the deal, such as The support for the Assad regime in Syria and its complicity in Assad’s atrocities against the Syrian people. In Yemen, the regime has escalated the conflict and used the Houthis as a proxy to attack other nations. In Iraq, Iran’s IRGC sponsors Shia militant groups and terrorists. In Lebanon, the Iranian regime enables Hezbollah to play a highly destabilizing role and to build an arsenal of weapons that threatens the region, according to the White House.
The Wall Street Journal reports that Iran has recently been exporting 2.7 million barrels a day of crude, which is close to 3% of global supplies. That supply will dwindle away and with demand growth, it will keep prices on an upward track.
You see, even if the United States continued to stay blindly in this Iranian deal, the market was tightening anyway. The report from the American Petroleum Institute (API) is showing us just how much, and is another reason oil is making more multi year highs overnight. The API reported a very disturbingly bullish picture for U.S. oil supply. The API reported not only a 1.85-million-barrel drop in crude oil supply, but a massive 6.674-million-barrel drop in distillate supply. That puts distillate stocks well below the five-year average and are dangerously low. Gasoline supply also fell by a sizable 2.055 million barrels leaving prices at the pump susceptible to even more price increases. As we have warned before, product prices are susceptible for upward price spikes so make sure you are hedged.
Now for some breaking news on oil. Sources are reporting that the U.S. government has authorized a study to perhaps lay the groundwork to get rid of the U.S. Strategic Petroleum Reserve. The SPR that was put in place as a response to the Arab oil embargo in the seventies is now being viewed as a relic of another era or a pre-shale oil era.
Other bull markets to note... Lumber prices continue to record highs as a tight housing market and logistical issues are driving prices. A strong economy and a strong housing sector, not to mention trade issues with Canada, is keeping that market rocking. Milk also looks like it is continuing its major bottom as the market is tightening after the loss of many dairy farms in recent years. Maybe a supercycle in milk is developing?