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The Energy Report

Phil Flynn
http://www.pricegroup.com/
pflynn@pricegroup.com


The Energy Report 04/23/19

Payback time

Global oil markets are still on the rise a day after the Trump Administration decided not to reissue sanction waivers to buyers of Iranian oil. Many doubted that President Trump would actually do this because of his concerns about the impact of rising gas prices on the average American, but it seems he really wants to put maximum pressure on the Iranian regime. The move is an attempt to deny Iran its principal source of revenue from oil, but it could have larger ramifications on the overall market as it is unclear that the loss of Iranian oil can easily be made up.

Oh sure, the Trump Administration is saying that they have talked with our friends and allies, like Saudi Arabia and the UAE, who are committed to ensuring that global oil markets remain adequately supplied, but what does that mean? These countries are still seething from the fact that President Trump granted waivers to Iranian oil buyers in the first place after they both raised output to replace oil from sanctions that never really happened. They lost billions and are not happy. So, they will not raise output preemptively.

So, this time they will wait to see what barrels will actually come off before they make a move. That move may be too late to stop a price spike. Reuters confirmed as much when they wrote that Saudi Arabia is willing to compensate for any potential loss of crude supply if the U.S. ends waivers granted to buyers of Iranian oil, but the kingdom will assess the impact on the market before raising its output. The Saudi source said that "We have agreed to take timely action to assure that global demand is met as all Iranian oil is removed from the market." Of course, by the time they confirm that, oil might be at $75 a barrel WTI. In fact, do not be surprised if the Saudis and the UAE let the Trump administration squirm a bit to send them a little payback for tricking them into raising production last year.

The Trump Administration is also looking for U.S. shale producers to pick up the slack. Of course, U.S. shale producers also took a hit by raising output ahead of the last promise of zero Iranian oil exports only to almost go bankrupt after waivers were granted. Many may not be in a real hurry to raise output. Yes, there will be more pipeline capacity coming on-line later in the year, but it won't be in the market before the kickoff of the U.S. summer driving season.

You also are going to have to deal with declining U.S. oil supply. The API should report another drop in crude oil, distillate and gasoline supply today. Refiners are going to be coming out of maintenance and we are going to face big time draws in crude supply going forward. We are predicting that crude oil supply will drop by 3 million barrels. Gasoline supply will fall by 3 million barrels and distillate supply by 2 million barrels. Refineries will process more oil and runs should rise by 1.0.

Oil in the big picture is now in a major V shape recovery, something that we predicted would happen earlier in the year. We said the crash in oil was mainly due to false perceptions about the global economy. Those perceptions were enhanced by crashing oil prices that were falling because of Trump's sanctions waivers. Now with no waivers and skeptical oil producers that will take a wait and see attitude, the market will be on track for a supply squeeze.

This means that both gas and diesel prices are set to rise. We will see a $3.00 a gallon national average, and diesel $3.30. AAA has gas prices now at $2.849 today and diesel at $3.080. According to one report the national average price of a gallon of gas hasn't declined in a record 70 days. The longest run on record.

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