Oil Futures May See Weakness If No New Headlines

January 7, 2020 08:43 AM
Oil market pulled from highs as unclear what actions Iran can or will take
Risk premiums are rising for freight and insurance costs for tankers
The Energy Report



The Phil Flynn Energy Report 

Teardrops Falling


Oil prices are pulling back as they await what Iran says will be a swift response to the killing of Gen. Qassem Soleimani.  The supreme leader of Iran, Ayatollah Ali Khamenei, cried at the funeral of slain Gen. Qassem Soleimani. I rather see tears in the eyes of the Ayatollah than more tears in the eyes of parents of American servicemen and women.

Qassem Soleimani not only led a reign of terror maiming thousands and killing U.S. soldiers and had even more plans to kill Americans. He led the killing of Iranian protestors who spoke out against this regime. Retired General David Petraeus said that President Trump’s killing of Iranian terrorist leader Qassem Soleimani was “impossible” to “overstate the importance” of the U.S. military taking out Qassem Soleimani. “It is more significant than the killing of Osama bin Laden or even the death of Islamic State leader Abu Bakr] al-Baghdadi. Soleimani was the architect and operational commander of the Iranian effort to solidify control of the so-called Shia crescent, stretching from Iran to Iraq through Syria and into southern Lebanon. He is responsible for providing explosives, projectiles, and arms and other munitions that killed well over 600 American soldiers and many more of our coalition and Iraqi partners just in Iraq, as well as in many other countries such as Syria. So his death is of enormous significance.”


Yet while the oil markets are worried about an Iranian response, the market has pulled back off from its highs as it is unclear what actions Iran can or will take. Because of the threats, steps are being taken to protect the flow of oil in tankers. Risk premiums are rising for freight and insurance costs for tankers passing through the Mideast Persian Gulf and Strait of Hormuz. The UK is sending warships to protect its tankers. Reuters is reporting that “A flotilla of oil tankers is sailing empty from Europe and the Mediterranean toward the U.S. Gulf Coast to take advantage of surging shipping rates, according to shipping sources and Refinitiv Eikon data on Monday. Eight tankers, an unusually high number, are in the Atlantic and steaming to the United States, with a capacity of up to 5.6 million barrels of oil combined. Freight rates for Aframax vessels out of the U.S. Gulf coast hit record levels last month, drawing more vessels to the region.


The AP reports that, “U.S. officials braced for Iran to respond to the killing of its most powerful general, noting heightened military readiness in the country and preparing for a possible “tit-for-tat” attempt on the life of an American military commander. They warned ships across Mideast waterways crucial to global energy supplies about the “possibility of Iranian action” against U.S. maritime interests in the region.


The truth is we do not know when or if Iran will strike back. Despite their many threats to do so, they have to be worried about our response to their response. In the past, Iran has gotten a pass for bad behavior. There was no fallout from the attack on the Saudi oil fields. President Trump did not respond when Iran shot down a U.S. drone. Now they have to be acutely aware that if they hit the wrong target, the U.S. may hit them back even harder.


The crude oil market will also get a look at U.S. supply. Last week U.S. exports hit a record. That may be hard to match because of fog in the Houston shipping channel. Still, we should see supply draws across the board. Crude, gasoline and distillate should see a 3-million-barrel draw.


Oil may see some weakness if there are no new headlines. Still, we expect the market to stay strong. Look to buy breaks and use options strategies to play the madness.

Don’t miss out on my wildly popular trade levels on all major markets as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.


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.