Crude oil prices are taking a step back on Monday as an increase in rig counts and a drop-in supply in Cushing, Okla., and a perceived drop in Geo-political risk premium are causing traders to take a step back. The U.S. oil rig count increased by five rigs last week, as U.S. producers are responding to higher prices and demand; but the real reason for weakness in oil may have been the fact that refinery maintenance is slowing the ravenous U. S. appetite for crude oil temporarily.
Crude oil prices are staying strong despite a strong dollar and unfolding stories about geopolitical risk. While the risk remains high that President Donald Trump will pull out of the Iranian nuclear accord, talks of peace in the Korean peninsula is shocking the world. A major win for the Trump Administration and for a world that wants peace. Fox Business Network is reporting that North and South Korea on Friday agreed to work on achieving “a nuclear-free Korean Peninsula through complete denuclearization.”
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."
While crude reacts to geopolitical headlines with more vim and vigor, the real reason that this market is more sensitive to these headlines is that global oil supply is tightening. It's due to the combination of underinvestment in the industry during the recent price crash and a fundamental misunderstanding of how the shale patch works. That has now left the oil market fundamentally undersupplied.
Making collusion great again. The OPEC says that its recent move to cut oil production had nothing to do with greed, but they acted with a “noble goal” of rescuing the global oil market. These comments came from the UAE energy minister Suhail Al Mazrouei, who said it’s not about raising prices it is about the noble endeavor of working to reduce oversupply. Well, in a way he does have a point.
Crude oil bears must face virtual reality as OPEC says that the global oil glut is “virtually” gone. Now there are reports that the Saudi oil minister Khalid al Falih wants to reduce stockpiles even further. Russian Energy Minister Alexander Novak is on board saying that Russia was committed to a deal on cutting oil supplies until the end of 2018, no matter what.
Venezuelan military rule of the state-run oil company PDVSA took an ugly turn after the Venezuelan military arrested two Chevron workers for what they say is graft and corruption. This comes as the American Petroleum Institute (API) reports a trifecta of draws in petroleum supply, and Morgan Stanly warning that U.S. refiners have had their fill of light shale condensate oil, something we have been warning about as well.
Buy the rumor and sell the fact. Many traders thought the run-up on crude oil was based only on the potential of an attack on Syria and fears that it would spin out of control. Yet, the run-up in oil has been about a lot more than just Syria; it's also about falling supply, rising demand and other geopolitical risk factors.
Markets rallied to key resistance levels and have to make an important decision this week. After two weeks of testing the bottom and coming to the middle of the range, will they fade here or go to the top of the range? It’s a mixed market with the Transports gapping up to start the week, but oil seems to have found a near-term high but violated the high it made earlier in the year.