Energy Report: Headline Writer Risk

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Sometimes oil moves on “headline risk” and sometimes it moves on “headline writer risk”.  Yesterday we saw a perfect example of that. On the official close, WTI oil technically traded above all the bull trend technical numbers driven by bullish Energy Information Administration “EIA data” and continuing concerns about a Russian invasion of Ukraine. Yet shortly after that official close, the market sold off hard, not only erasing the session’s previous impressive gains but raising concerns that somehow something major had changed. The reason was headlines that started to leak across the news scrolls setting of algorithms and causing a bit of a panic sell-off. It was not about Russia or Ukraine but Iran and news surrounding the Iranian nuclear talks. 

The headline screamed that the U.S. State Depart said that the, “US is amid the last stages of nuclear discussions with Iran”. While of course, that is encouraging, it is by no means that they have a deal sealed. The next headline said that Iran’s lead nuclear negotiator Ali Bagheri Kani said, “After weeks of intensive talks, we are closer than ever to an agreement”. Yet if you read the entire quote, it was a bit more complex. The full quote read, “Iran’s lead nuclear negotiator Ali Bagheri Kani responded in a tweet, calling on Western powers “to be realistic, avoid intransigence and heed lessons of past 4yrs. Time for their serious decisions.” It then went on to say, “After weeks of intensive talks, we are closer than ever to an agreement; nothing is agreed until everything is agreed, though.” So in other words, it is not a deal until it’s a deal.

If you sold off oil in the last year because of optimistic headlines surrounding a new Iranian nuclear deal, you regretted it shortly thereafter. While this time may be different because of the Biden administration’s dismal poll numbers, they may just give away the house and perhaps suitcases full of cash and do any deal just to get a deal.

Another headline that came out said that it is unlikely that Secretary State Anthony Blinken and Iran’s Foreign Minister will meet in Munich. So in other words it is unlikely that they believe that an Iranian oil deal is imminent.

Yet assuming we do get a deal, what will that mean. S&P Global Platts suggests that if sanctions on Iran are lifted, they could add as much as 700,000 barrels of oil a day. Yet some doubt that number and some believe it could be half of that. Yet let’s assume that Iran does add 700,000 a day. OPEC plus would still be short of hitting its quota by 300,000 barrel day. Besides, Iran has been exporting oil to China and Venezuela anyway. So, what is the big deal? Iran's official light crude price for March was increased by $2.65 per barrel.

Oil watcher, Tim Dallinger, says the key to the market impact from a lifting of sanctions will be Iran’s amount of oil in storage. Reports suggest that they have a lot of condensate in storage and already are talking to South Korea that needs that light oil. So, it will be interesting to see but more than likely after an initial selloff in oil, the global market will soon realize that we are still undersupplied. Still, prices have to adjust especially in a market that is higher because of war fear premium. Oil bounced back on a headline that read, “Ukraine’s military forces fired mortar shells and grenades at 4 LPR locations, according to Sputnik. Another headline said that Ukraine’s Russian-backed rebels claimed that Ukrainian government forces have shelled their territory with mortars.

Yet as we learned before, it’s difficult to assess the truth from these headlines. Claims that Ukraine shelled in Russian-backed rebels’ territory have yet to be confirmed. It is also unclear that it will lead to a wider conflict even if it is true. The headline today quotes the Russian defense minister as saying that Russian troops continue to return to their permanent bases following drills. The U.S. and Nato still have not confirmed that.

The headline risk premium is driving oil market volatility. The trend is still decidedly higher for oil and products. If there’s a plan to quickly resume Iranian oil exports that could be a situation that could take us out of the uptrend and put us into a short-term downtrend. We believe that the downtrend would be limited in scope. 

On the flip side, as we get closer to the weekend that includes the President’s Day holiday on Monday, traders more than likely might find it dangerous to be short unless we see a major de-escalation by Russia away from the Ukraine border. Europe gets some 40% of gas, 26% of oil needs from Russia according to data from Reuters. Russia has signed new oil, gas supply deals with China. Biden warns of ‘export curbs’ if Russia invades Ukraine. Russia denies it has any plans to invade Ukraine.

U.S. oil data was very bullish. EIA put U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.1 million barrels from the previous week. At 411.5 million barrels, U.S. crude oil inventories are about 10% below the five-year average for this time of year. Total motor gasoline inventories decreased by 1.3 million barrels last week and are about 3% below the five-year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 1.6 million barrels last week and are about 19% below the five-year average for this time of year. Total commercial petroleum inventories decreased by 9.9 million barrels last week. Total products supplied over the last four-week period averaged 22.1 million barrels a day, up by 11.9% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 8.6 million barrels a day, up by 8.0% from the same period last year. Distillate fuel product supplied averaged 4.5 million barrels a day over the past four weeks, up by 4.5% from the same period last year. Jet fuel product supplied was up 27.7% compared with the same four-week period last year.

With all the focus on oil, it was natural gas that seemed to steal the limelight. Natural gas exploded to the upside because of winter refusing to leave. The forecast for spring seemed to get further out in the future. Production levels of natural gas have been impacted by winter weather and we may see another huge withdrawal from natural gas storage. The average guesses for today’s Energy Information Administration report are for a withdrawal of 195 BCF though it could be another week where we see it draw more than 200 BCF. If we draw more than 200 BCF look for natural gas to try to attempt new highs. Russian Ukraine tensions are offering some backdoor support as well.