The Oil Market Has New Life After Much-Needed Perspective

August 23, 2021 12:30 PM
Inflammatory actions from Iran will likely add to the risk premium for oil
The risk premium for oil is bound to go up, which should lend some further support
The long-term picture for natural gas is still very bullish and it's unlikely that we're going to get a big selloff
Energy Report

Energy Report

The Phil Flynn Energy Report 


Joe Biden is being called out by our allies for his failure to help the American people and our allies in what former UK Prime Minister Tony Blair calls an “imbecilic” decision to withdraw troops from Afghanistan. The president’s unwillingness to take responsibility for his historically monumental failures is hurting U.S. prestige in the world and is making our country less respected, less safe, and crushing any moral authority that we once had. 

While meeting with her party’s top brass, German Chancellor Angela Merkel said that once the U.S. decided to withdraw, it was clear that other allies had to follow suit. The decision was “ultimately made by the Americans,” and for “domestic political reasons.” Even Russian President Vladimir Putin is worried that the fall of Afghanistan is going to allow the spread of radical Islam around the region and increase the risk of terrorist attacks.

Other repercussions of this administration can also be seen in Iran. Iran isn’t only upping its uranium enrichment, they’re also openly flaunting U.S. oil sanctions and are now calling on Japan to unfreeze the Iranian assets which are being sanctioned by the U.S. This will all add to the risk premium for oil and we’ll all be paying the price.

Reuters reports the following:

The leader of the Iranian-backed Hezbollah group, Hassan Nasrallah, said on Sunday that vessels carrying Iranian fuel will be setting sail soon followed by others to ease fuel shortages in Lebanon.

Nasrallah insisted that the group was not trying to step in and replace the state by purchasing the fuel. The first vessel which last Thursday the group announced was about to leave Iran, had already sailed, he said.

"We are not taking the place of the state, nor are we an alternative to companies that import fuel," he said in a speech to supporters without elaborating on how the shipments would enter the country.

Hezbollah's foes in Lebanon have warned of dire consequences from the move, saying it risked sanctions being imposed on a country whose economy has been in meltdown for nearly two years.

Also from Reuters, the following was reported:

Iran's President Ebrahim Raisi called on Japan to release Iranian funds frozen in the country because of U.S. sanctions, Iranian state TV reported after the president met on Sunday with the visiting Japanese foreign minister.

Iran has been unable to obtain tens of billions of dollars of its assets mainly from exports of oil and gas in foreign banks, including $3 billion of its funds in Japan, due to U.S. sanctions on its banking and energy sectors. The sanctions were reimposed in 2018 after Washington abandoned Tehran's 2015 nuclear deal with six world powers.

"The improvement of ties with Japan is of great importance for Iran ... Any delay in unblocking Iranian assets in Japanese banks is not justified," Raisi said in his meeting with Toshimitsu Motegi, who arrived in Tehran late on Sunday for a two-day visit.

It appears that Iran is looking to increase its military strength by working with Russia and China to create a military alliance. News reports say China and India will hold military drills in the Persian Gulf in late 2021 and early 2022.

A fire at a Pemex well platform in the Gulf of Mexico is perhaps another reason why the market was a bit supported this morning. Any problems in the Gulf of Mexico raise questions as to whether we could see more regulation from the Biden administration to restrict production. It’s far too early to say, but we’ll continue to monitor the situation.

People were able to put things in perspective in the aftermath of all this weekend’s drama, and it looks like the oil market has new life. Last week, we heard a lot of “doom and gloom” talk about the rise of Covid-19 cases, but now we seem to be flipping back towards optimism about economic growth and continued stimulus. 

The risk premium for oil is bound to go up, which should lend some further support. We should also see U.S. oil inventories continue to fall as demand for gasoline remains relatively high. If we don't see any shutdowns due to Covid-19, the market is still going to be undersupplied and we're still going to see a trend of falling inventories around the globe— that should give the market some longer-term support.

Another heatwave is giving natural gas some support. It's going to continue to add cooling degree days to the market next week at a time where things normally calm down. The long-term picture for natural gas is still very bullish and it's unlikely that we're going to get a big selloff, but if we do, look to buy calls.

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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.