The Great Tightening
While oil reacts to geopolitical headlines with more vim and vigor the real reason that this market is more sensitive to these headlines is because global oil supply is tightening. The combination of underinvestment in the industry during the recent price crash and a fundamental misunderstanding of how the shale patch works. That has now left the oil market fundamentally undersupplied. Oil set a generational bottom near $26 a barrel and when low prices and a strong economy set off demand, the producers fell behind the curve. Now it seems that even if OPEC and Non-OPEC start to edge up production it may be a little too late for this undersupplied market.
Of course I am not saying that a breakdown of the OPEC/Non-OPEC deal wouldn’t have an impact on price. We saw the market break yesterday over a dollar on a report that Iran was signaling that it might offer discounts on its oil to preserve market share ahead of potential sanctions on their supply. Traders feared after the report that Iran might flood the market with oil as it tried to raise cash ahead of what could be some very lean times for the country. The trade also feared for a moment that this discount by Iran could derail the larger OPEC-Non-OPEC alliance.
Yet the reality is that Iran would be hard pressed to raise output much and most of their floating has already been sold. Other members of the cutback alliance might cut Iran some slack because as soon as the sanctions are in place they will be able to pick up Iranian market share. Besides, with global demand growing over 2 million barrels of oil a day the market should be more worried about the loss of future Iranian supply.
Yemeni Houthis rebels, backed by Iran, shot more missiles at Saudi Arabia and were shot down. But that had consequence for the Houthis. MarketWatch reported that oil prices gave up earlier declines Monday to settle higher, as reports that a Saudi-led air strike killed the head of the Houthi rebels in Yemen raised the potential for disruptions to the flow of crude in the Middle East. "The fear of geopolitical risk, and the reality that supply will tighten again this week, brought the market back," said Phil Flynn, senior market analyst at Price Futures Group. Saleh al-Sammad, political leader of the Houthi rebels in Yemen, was killed in Saudi-led air strikes, Al Jazeera reported.
Now comes a report from “Oil Price“ that says that Yemeni Houthis have captured 19 oil tankers and are keeping them from entering the Hodeidah port, according to reports from Saudi media quoting Kingdom’s ambassador in Yemen. The ambassador suggested three possible reasons for the detention, including an attempt to extract money from the owners of the vessels, “the continued starvation of the Yemeni people,” and a plan to destroy the tankers, causing major environmental damage to the Red Sea. Tensions against a tight oil market is adding to the major moves. That tightness was reflected from a supply report from Genscape that shows that last week’s increase in Cushing Oklahoma crude supply may have been fleeting. The private forecaster says that supplies at the storage hub have fallen by 560,000 plus barrels in just the last few days. This is putting supply at that hub at dangerously low levels
The bottom line is that oil is in a very bullish mode. Oil is in a super cycle mode and may rally into the Memorial Day kickoff to the Summer Driving season before we take a break. Oil companies and oil service firms should start to benefit as will shale producers that are cash flow positive now in many cases. Hedgers need to be hedged against significant upside risk.
Even gas prices at the pump are on the rise. GasBuddy reports that the national average for a gallon of gasoline has risen 5 cents per gallon in the last week to $2.76 per gallon today, according to GasBuddy’s latest weekly survey of 135,000 gas stations. The gain comes as oil prices continue to surge, rising last week to a new multi-year high as global demand outpaces supply and OPEC maintains production cuts. I will be interviewing Patrick DeHaan, head of petroleum analysis for GasBuddy today for Pricelinks so make sure you tune in or call me for a link.
Diesel fuel is tight as farmers get a slow start to planting. When the planters ramp up, look for another spike in diesel prices. Natural gas is still being lifted by mother nature. Still we think itis days are numbered so buy puts.