Murky Outlook

The outlook in the short term for oil looks a bit murkier this morning. A surprise 2.4-million-barrel increase in oil inventories reported by the American Petroleum Institute (API) and concerns that the Trump administration is looking to expand the technology ban it put on Huawei. Stocks rallied back as the Trump Administration granted a bit of a grace period, but reports that he is expanding the ban to other Chinese companies like ZTE, Hytera, and Dahua, as well as others,  caused some oil selling overnight on concerns the trade war might hurt global oil demand. Yet while the oil struggles on the headlines of the moment, talk of a tight oil physical market and less than a satisfying 350,000-barrel increase in gasoline supply with a draw of 237,000 barrels in distillate supply show that, for petroleum products we have a tight market and not a lot of room for error. Refiners at some point will have to rise to the occasion and start ramping up soon and these recent crude oil increases will soon become a distant memory.

Oil is also easing on reports that the threat of hostilities with Iran has cooled off. The Wall Street Journal reported that “Acting Defense Secretary Pat Shanahan, who briefed congressional lawmakers, said that the prospect of an Iranian attack on Americans has been put ‘on hold’, outlining a reduction of the potential threat after earlier U.S. intelligence suggested a high degree of danger. I think our steps were very prudent, and we’ve put on hold the potential for attacks on Americans,” Mr. Shanahan told reporters. “And that’s what’s extremely important.”  That easing of tensions, while not a guarantee, is reducing some of the risk premium.

Risk premium is real and does affect prices. I hear from some folks that think that risk premium is just an excuse to jack up prices, but they are wrong. Bloomberg News, for example, reported that “Not since 2005 have the world’s insurers considered shipping in the Persian Gulf so dangerous for oil tankers.” The Joint War Committee of London’s Lloyd’s Market Association said Friday that it would expand its so-called ‘listed areas’ -- those regions that pose the greatest risks for shipping, and potentially warranting higher insurance costs -- to include the entire Persian Gulf. The last time the entire region held the designation was a period that ended in June 2005 and encompassed the most recent Iraq War. It highlights the growing risks in the world’s most important export region and chokepoint for oil.”

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