Crunch Time

Oil prices are bouncing back on hopes that the U.S. might avoid a government shutdown and talk of progress on the U.S. China trade talks. White House adviser Kellyanne Conway told Fox News that “This president (Trump) wants a deal. He wants it to be fair to Americans and American workers and American interests.” Fox News also reports there is a deal to keep the government open, but with far less money for a wall then President Trump originally wanted. So, if we indeed get resolutions on these thorny issues, oil demand will outperform expectations and then oil prices go into crunch time. In other words, if we get a China deal coupled with OPEC cuts and Venezuelan sanctions, we are most likely going to see a supply crunch.   

The recent crash in the price of oil assumed a lot of economic doom and gloom. If the gloom is not so gloomy, it is very possible that the oil market might be undersupplied.

It is not only me saying this. The CEO of BP, Bob Dudley, warned that oil market uncertainty could lead to a “real crunch”. In an interview with a CNBC reporter, he warned that  “there's a lot of variables here and there's a lot of things that could lead to a real crunch." Dudley said that " when prices are too high or too low, it leads to all kinds of unintended consequences."

For oil, we have had more than our share of unintended consequences. When President Donald Trump talked about sanctions on Iran, it caused prices to go too high too fast. When he tweeted about OPEC, he caused them to break too fast. When the OPEC and U.S. producers ramped up production to offset the lost Iranian barrels, it had consequences. When President Trump granted waivers to Iran’s biggest buyers, it had consequences.

The break in price forced drillers to cut back on rigs. It caused oil companies to cut back on investment and now OPEC is determined to remove any hint of excess supply.

Now with refiners scrambling to replace the heavy sour oil from Venezuela, we are seeing gas crack spreads start to improve showing the first signs that we may see tighter gasoline supplies once we get back to the summer driving season. Diesel prices are at big risk as well, especially if the refiners can’t find enough heavy crude.

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