Oil Back On An Upward Track

Oil prices are back on the rise as the market is in a risk on mode and the trade must get ready for another big potential drop in supply. The OPEC cuts, along with zero exports from Venezuela, will take its toll as U.S. exports may hit a record high. Shutdowns in the Houston Shipping Channel make it a bit harder to handicap. The Houston Chronicle says that the closure of a portion of the Houston Shipping Channel, in the aftermath of the days-long Deer Park chemical fire, could cost the petroleum and petrochemical sectors an estimated $1 billion in direct and indirect costs and lost revenues, experts said. Yet with U.S. demand soaring, we could see another week of oil and product drawdowns across the board. Conservatively, we expect that U.S. crude supply will fall by 2.5 million barrels, gasoline should fall by 3 million barrels, with distillates down 2.0 million. 

On top of that, you have geopolitical risk rising as Russia is sending some soldiers to Venezuela.  The AP reported that two Russian military planes touched down outside the capital Caracas on Saturday, carrying nearly a hundred troops and military staff, and 35 tons of cargo, according to media reports. Russian state news service Sputnik, citing an anonymous source, dismissed the deployment as "nothing mysterious" and said the officials were planning to discuss "defense industry cooperation" with their Venezuelan counterparts.

U.S. Secretary of State Mike Pompeo spoke to Russian Foreign Minister Sergey Lavrov and called on Moscow "to cease its unconstructive behavior" in Venezuela, the State Department said in a statement. In the phone call, Pompeo told Lavrov that "the U.S. and regional countries will not stand idly by as Russia exacerbates tensions in Venezuela", reports Xinhua news agency. Pompeo noted that the presence of Russian military personnel in Venezuela "risks prolonging the suffering of the Venezuelan people." In response, Lavrov said: "Washington's attempts to organize a coup in Venezuela and threats against its legitimate government are in violation of the UN Charter and undisguised interference in the internal affairs of a sovereign state." The New York Post reported that the United States “condemns Russia’s deployment of military aircraft and personnel to Caracas, which is another contradiction of both Nicolas Maduro’s and Russia’s calls for non-intervention in Venezuela and is a reckless escalation of the situation,” a State Department spokesman said.

The Trump administration has demanded that Maduro cede power to opposition leader Juan Guaidó. The potential escalation of tensions means that Venezuelan oil will be off the market for some time. It is also a very disturbing development from a national security point of view. Despite slowdown fears, global demand led by the U.S. is still solid and while it may slow down at some point, it is unlikely to happen before OPEC meets. The Saudis are on board saying they want $70 a barrel oil, which is lower than the $80 they said they wanted earlier. Regardless, it is another bullish sign and it is clear that the Saudis want revenge on President Trump, who cost them a lot of money by waiving sanctions on Iran. Bloomberg News is reporting that “President Donald Trump’s national security team is deeply divided over whether to let a small group of countries keep buying Iranian oil after a U.S. deadline on sanction waivers expires in May.” Now that fight is getting ugly. The division -- primarily between John Bolton’s National Security Council and Michael Pompeo’s State Department -- has led to rising frustration and flared tempers. It’s exposing fault lines over how the president’s most senior advisers approach the Iran issue, according to four people familiar with the debate who asked not to be identified discussing the internal deliberations.

Above the fray, at least for now, is a president who must weigh competing priorities. While Trump wants to make good on his “maximum pressure” campaign against Iran and strong-arm it into meeting U.S. demands -- including ending its ballistic missile tests and support for Hezbollah -- there’s also concern that squeezing Tehran too much will lead to a spike in oil prices. That could raise gasoline costs for U.S. drivers as the 2020 election approaches. Mark Dubowitz, chief executive officer of the Foundation for Defense of Democracies, was previously open to the waivers but now believe issuing them sends the wrong signal. “I’m sympathetic to where Brian Hook and Secretary Pompeo are in striking a balance between zero Iranian oil and global oil prices,” Dubowitz said. “But today’s oil market supports zero. So, either you’re running a maximum pressure campaign against Iran or you’re not.”

While the floods may have cost us some acres, tight diesel supplies mean we have big upside risks for farmers. We suggest being safe rather than sorry and make sure you get hedged. Gas prices are up 6 weeks in a row and we will probably see seven or eight! Remember the good old days of cheap gas 6 weeks ago? 

Nat Gas demand and production are at records! The Energy Information Administration is reporting that power consumption was the main reason for record demand. The EIA said natural gas consumption increased by 10% in 2018, reaching a record high of 82.1 billion cubic feet per day (Bcf/d), according to EIA’s recently released Natural Gas Monthly. Domestic consumption of natural gas increased across all sectors in 2018, led by a 3.8 Bcf/d increase in the electric power sector caused by a combination of recent natural gas-fired electric capacity additions and weather-related factors. The electric power sector consumed 29.1 Bcf/d in 2018, or 35% of total domestic U.S. natural gas consumption. Natural gas continued to make up the highest share of utility-scale electricity generation after the first surpassing coal-fired generation on an annual basis in 2016. Specifically, natural gas accounted for one-third (35%) of utility-scale electricity generation in 2018, followed by coal (27%), nuclear (19%), and hydropower (7%). New natural gas generator capacity additions continued to displace coal-fired power plants and other less efficient sources of electricity. In 2018, about 14.5 gigawatts (GW) of net natural gas capacity were added, while almost 13 GW of coal-fired capacity were retired.

Annual fluctuations in natural gas consumption are largely driven by weather. During the winter, U.S. natural gas consumption levels are at their highest because natural gas is the predominant source of space heating in the residential and commercial sectors. As natural gas makes up a larger share of electricity generation, natural gas consumption increases both in the summer—when air conditioning demand is high—and in the winter, especially in places such as the South where electric space heating is more common.

In 2018, the United States experienced several periods of extremely warm and cold weather, contributing to record-high natural gas consumption. Much of the Lower 48 states experienced prolonged periods of colder-than-normal temperatures in January 2018, and record-high average monthly temperatures during summer 2018 increased natural gas use in the electric power sector. In July 2018, natural gas consumption in the electric power sector set an all-time record of 39.9 Bcf/d, followed by the second-highest recorded level in August 2018 of 38.6 Bcf/d.