The Phil Flynn Energy Report
Oil prices are declaring, "no risk to supply" after President Trump's actions against Iran caused them to stand down in their quest to attack oil supplies. Already we see risk premium fall and tanker rates start to drop. Not even record stock prices and the signing of the U.S.-China trade deal is giving us a bid yet. China is even looking to help the U.S. put more pressure on Iran in joining the U.S. in banning Iranian oil. U.S. Secretary of the Treasury, Steven Mnuchin, told Fox News, "Sunday Morning Futures" with Maria Bartiromo that the U.S. is working closely to cut off Iranian oil. Mnuchin told Maria Bartiromo that the U.S. had eliminated over 95% of Iran's oil revenues. Yet roughly 70% of the remaining Iranian oil exports are being sent to China, which remains Iran's biggest crude buyer.
Still the oil trade thinks it is unlikely that Iran will attack anything, including oil or oil facilities, while protests break out at home over the downing of the Ukrainian passenger jet. The Wall Street Journal reported that, "the Trump administration now believes that the killing of General Soleimani and sanctions its actions have left the regime depleted, with dwindling options".
The Journal reported that “On Sunday, Mr. Trump’s national security adviser, Robert O’Brien, said the government in Tehran is coming under intense pressure, leaving it with few alternatives beyond a negotiated settlement with the U.S". “What’s going to cause them to negotiate is the pressure on their economy, and when you’ve got students out chanting ‘death to the dictator’ and when we have thousands of Iranians out protesting in the street, that’s the sort of pressure that’s going to bring them to the table,” Mr. O’Brien said on Fox News Sunday. The Journal reported that “Mr. Trump quickly countered Mr. O’Brien’s comments, in English and Farsi, with a tweet: “I couldn’t care less if they negotiate. Will be totally up to them but, no nuclear weapons and ‘don’t kill your protesters.’”
The Journal is also reporting that “Britain, France and Germany will take the first step toward reimposing international sanctions on Iran on Tuesday, European diplomats said, their first significant response to Tehran’s escalation of its nuclear program. While European powers say they want to save the 2015 nuclear pact—which limited Iran’s nuclear program in exchange for economic incentives—they have decided to trigger a dispute-settlement mechanism written into the agreement. That will lead to a process that could result in the United Nations Security Council reimposing international sanctions on Iran’s economy, banks, and some top officials within two months. Earlier this month, Iran said it would no longer abide by any restrictions imposed by the deal on its production of enriched uranium, which can be used as fuel for a nuclear weapon. European diplomats told The Wall Street Journal last month they would trigger the dispute mechanism in January if Iran took any further steps away from the nuclear deal."
So with Iran, boxed in the market is squeezing out almost all geopolitical risk premium. They may be pricing out more than was actually in it as fundamental buyers are getting washed away along with the risk buyers. As in most cases, when we see these events happen, we know that the market will overdo it to the downside and perhaps today that selling can be over. At that point, we can focus on demand that by all accounts is stronger than expected in China.
Reuters reports that "China’s crude oil imports in 2019 surged 9.5% from a year earlier, setting a record for a 17th straight year, as demand growth from new refineries built last year propelled purchases by the world’s biggest importer, data showed today. Reuters says, "Last year, China imported a record 506 million tonnes of crude oil, according to data from the General Administration of Customs. That is equivalent to 10.12 million barrels per day (bpd), according to Reuters’ calculations based on the data. Chinese crude imports have set records every year since 2003, according to customs data on Refinitiv Eikon. December arrivals were 45.48 million tonnes, customs reported. That is equivalent to 10.71 million bpd, according to Reuters’ calculations, the third-highest ever on a daily basis and down from a record of 11.13 million bpd set in November. The annual increase equates to 882,000 bpd in incremental purchases, largely because of demand from new plants that added 900,000 bpd to China’s oil-processing capacity, although some of the units started operating only in December. December imports were boosted by private refiners using up their annual import quotas, while state plants stocked up on oil before the holiday shutdown that accompanies China’s Lunar New Year festival, which falls in late January this year."
Record U.S. stock prices should also bode well for U.S. energy demand. Weekly Inventories this week may still be skewed because of bad weather. Still, we should be close to a bottom. Don’t get crazy but start looking at some bullish strategies.
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