Wavering Bulls

Are there waivers coming from the US to some buyers of Iranian crude oil? The US government and OPEC are doing their part to try to cool oil prices ahead of US sanctions on Iran and yesterday they had some success. Not only did we see a 1.5-million-barrel release from the US Strategic Petroleum Reserve, to cool off what really was a bullish Energy Information Administration (EIA) supply report, you also had a suggestion by US Security Advisor John Bolton that we might not see zero exports from Iran right away. In fact, there is talk that the US is going to grant waivers to some buyers of Iran crude as many countries need oil to build up products ahead of winter and the US is hard pressed to find alternative supply, as product demand was just off a record high for this time of year as total products supplied over the last four-week period averaged 20.6 million barrels per day, up by 5.4% from the same period last year.

US oil production that was surprisingly flat for the last few weeks almost magically surged rising by 300,000 barrels a day, from 10.9 million barrels to 11.2 million barrels a day in one week, one of the biggest weekly jumps in recent memory. US production numbers from the EIA in recent weeks have raised questions by market watchers why they failed to move or change. Some wondered whether the EIA was not reporting the data or that it never changed from week to week. Now after this one-week spectacular increase in production, one must wonder whether the EIA is playing catch up with the last few reports that showed no increase or whether the jump in production is a sign of more production increases to come. With more pipelines coming online, more shale can get out, so producers could be taking advantage of that. Yet, even so, it is more likely that production has been going up for a while and the EIA just caught up with the real number.

On top of that, you had a report from Reuters that showed OPEC production at the highest levels since 2016. In October, the 12 OPEC members bound by the supply-limiting agreement lowered compliance to 107 percent as production rose, from a revised 122 percent in September, the survey found. This is the closest OPEC has moved to 100 percent compliance since the June agreement. The biggest increase has come this month from the UAE. Output in October rose by 200,000 bpd to 3.25 million bpd, the survey found, and could, in theory, rise further as the UAE says its oil production capacity will reach 3.5 million bpd by the year-end.

Yet what really had oil give up the bullish ghosts were the comments by U.S. National Security Adviser John Bolton that several countries may not be able to cut Iranian oil imports to zero right away. The Economic Times of India reported that the US has broadly agreed to grant India a waiver from Iran sanctions, which would allow Indian Oil companies to continue to import about 1.25 million tons of oil a month from Tehran till March, sources familiar with the matter said, adding that an official announcement could come over the next few days. Now there is talk that other counties like China might ask for a pass as well.

So, the market is betting on supply that may be there later but it is clear that it is not here now. While the U.S. commercial crude oil inventories did increase by 3.2 million barrels from the previous week it was buffeted by a 1.5-million-barrel release from the SPR. And at 426.0 million barrels we are still just 2% above the five-year average for this time of year.  That is not very comforting when you consider that total commercial petroleum inventories decreased last week by 6.4 million barrels.

Distillate inventories are still a worry as supply tanked by 4.1 million barrels and are now 5% below average for this time of year. Not good. Total motor gasoline inventories decreased by 3.2 million barrels last week and are about 6% above the five-year average for this time of year.

While we got wacked on hopes that Iran’s oil may not disappear entirely the reality is that we can’t run crude oil for heating and in our trucks and factories. While the Crude price crash may provide some hope that we may survive the Iranian sanctions, the reality is that we still have no margin for error and we still have significant upside price risks.

Another factor that weighed on prices over the last few weeks was the great Mexican Hedge. Bloomberg News reported that “Mexico Spends $1.2 Billion to Lock in Crude Rally for 2019”. The hedges, often known as Wall Street’s largest oil trade, are kept private to prevent hedge funds and trading houses from front-running the Mexican government’s orders. The document doesn’t detail how much crude was hedged. The government may be close to finished with purchasing the hedges to cover next year’s exports, assuming costs remained about the same as last year when it spent 24.1 billion pesos.