A New Sheriff In Town

President Donald Trump, launching air strikes on Syria overnight, sent a strong message that the U.S. will react quickly and decisively when another country uses chemical weapons. The response establishes that the U.S. will not tolerate the use of such weapons and will not make empty threats when it comes to crossing that line. For oil, we saw a big spike but eased back as the market is thinking that the message has been sent and there may be no more immediate action. Still, with a tightening global oil supply picture, we will see increased geopolitical volatility.

While Syria is not a major oil producer, they have the largest producing potential in the Eastern Mediterranean region. Syria's 2,500,000,000 barrels of petroleum reserves but was exporting only modest amounts of oil. In fact, ISIS was exporting more oil out of Syria than the Syrian government was at one point. Still, Syria, bordering Iraq and Turkey, raises the threats to supply routes, pipeline, and production along the border with Iraq. Syria also produces natural gas but that production has been greatly reduced due to the civil war and they barely produce enough to keep the lights on.

The response by President Trump does show that there is a new sheriff in town and one that is not going to wait around to act against crimes against humanity. Even as Russia says that this has violated international law and has harmed relations with the U.S., that is really a joke. Russia, of course, had no regard for international law when he took over Crimea. Syria had no regard for international law when it used chemical weapons not once but twice on its own people. Syria was supposed to have already given up its chemical weapons. The response by the U.S. was the right one.

The tougher stand by the U.S. in the short run may add to the risk premium in oil in the short term but in the long run, it may reduce it. The U.S. is the world’s only superpower and the world needs to reign in ISIS and bad actors like Assad that has made the world a more dangerous place for innocent citizens of the world.

 Supply tightening is starting to happen. Floating storage in Asia and in the Middle East is starting to fall and that will accelerate as strong seasonal demand starts to take hold. Global output will struggle to keep up with demand growth moving forward. Big oil is having a hard time breaking even and are relying on cheap shale plays as opposed to more sustainable projects that will not meet the demand growth needs of the globe in the coming years. Inventories will fall. It is not a matter of if but when.

The ‘when” part has kept U.S. inventory high but one must focus on the steep drop in products. Overall inventories in the U.S. have been falling for several weeks. Oil is on a path higher and while we may pullback a bit, the risk to be short has gone up dramatically.

Natural gas supply rose 2 bcf from the previous week. That leaves supply 17.2 percent below one year ago levels, raising concerns about production and meeting demand. The gas glut is ending as well.