Danger Points

Oil prices have reached a critical danger point as selling comes in on fears of a slowdown in economic growth. Recent increases are giving the market a sense of security that supplies will be more than ample to weather whatever comes. Yet, the market's complacency about where we are with supplies is based solely on the belief that global demand will slow, something that may not happen. If it does not happen, the globe will be facing a global supply versus demand deficit.

Demand for oil products right now are at a record high and with the upcoming sanctions on Iran, users of oil products need to get hedged. Refiners are going to start to come out of maintenance and this refining season should see a surge in refining demand met by declining supply and the real possibility of oil prices spikes. The challenge to meet that demand in the futures is going to leave the oil market the tightest we have seen in over a decade. Reuters reported that Russian Energy Minister Alexander Novak said on Saturday there was no reason for Russia to freeze or cut its oil production levels, noting that there were risks that global oil markets could be facing a deficit.

We fear that the recent selloff may have some users under hedged at a time when risks to the upside remain high. We have already heard from many airlines, American for example, that saw their earnings impacted by high fuel costs and being under-hedged. Other companies have been hurt by predictions of lower for longer as complacency set in and by being swayed by the correction of the moment and not focusing on the big picture. The correction in oil and especially in distillate should be viewed as a great opportunity to get hedged ahead of winter. If the economy does slow, it is still better to be safe than sorry.

Reuters is reporting that three of Iran’s top five customers – India, China, and Turkey - are resisting Washington’s call to end purchases outright, arguing there are not enough supplies worldwide to replace them, according to sources familiar with the matter. Reuters says that pressure, along with worries of a damaging oil price spike, is putting the Trump administration’s hard line to the test and raising the possibility of bilateral deals to allow some buying to continue, according to the sources.

Yet, at the same time, we have reports of buyer’s compliance to the deal. China’s National Petroleum and Sinopec told to halt purchases before new measures take effect on November 4. Companies that continue to buy Iranian oil risk being excluded from U.S. the financial system and China wants to use Iranian oil as a bargaining chip in negotiations with the US over trade.

Reuters is reporting that Iran began selling crude oil to private companies for export on Sunday, part of a strategy to counter U.S. sanctions which come into effect on Nov. 4 and aim to stop the country’s key crude exports, the oil ministry’s news website SHANA reported. Crude oil trade is state-controlled in Iran. Earlier, private refining companies could only buy crude oil for exports of oil products, officials have said.

Bloomberg News says that Saudi Arabia is scaring hedge funds. They say that money managers slashed bets on rising West Texas Intermediate crude prices to the lowest in more than a year, with total positioning on the U.S. benchmark down to a level last seen in 2015. While Saudi Energy Minister Khalid Al-Falih said OPEC is in “produce-as-much-as-you-can mode” to offset sanctions on Iran, a global equity meltdown and worries over demand haven’t helped either You have sanctions on Nov. 4 that kick in and the big question is how much will those other countries produce to make up the gap, said Mark Watkins, who helps oversee $151 billion at U.S. Bank Wealth Management. At the same time, “the global economy is showing some signs of stress and that’s making investors just a little bit more nervous as a whole.”

Of course, hedge fund liquidation could be a sign the bottom may be in soon for oil. The seasonally weak period for oil ends this week and maintenance will be ending. If the economy does not slow, we will see oil spike. Our beginning of the year target for oil to hit $84 is still valid.

Natural gas looks a little toppy, but it could snap back if weather gets cold. Andrew Weisman, at EWB Analytics, says that natural gas prices have swung back and forth sharply during the past eight trading sessions, with an average movement of 6.8 cents per day, due primarily to uncertainty regarding early and mid-November weather. Since last Friday, weather models have lost significant space heating demand during the 1-5 and 6-10 day windows but gained some of these losses back in days 11-15. Until the weather models stabilize, natural gas price volatility is likely to continue. The continued forecast shift toward near-normal weather across the eastern U.S. is expected to sap power demand and weaken prices at a number of regional wholesale hubs this week. CAISO, on the other hand, may see sustained upside price risk.