Israel has declared war on Hamas. Hamas, reportedly with the backing of Iran, unleashed a reign of terror where the death toll reportedly exceeded 1100 to this point. This conflict adds complications for the global energy markets and while the supply of oil currently is not being impacted negatively in any way, the risk to the stability of the global oil market is enormous.
Breaking. First Squawk is reporting that CHEVRON has been instructed by Israel’s Ministry of Energy to shut in production at the Tamar Production platform.
The possibility of war escalation is high. There were more missile attacks overnight and this morning reports of 100,000 Israeli troops amassing on the Gaza border. There are also questions about whether Biden giving money to Iran, despite warnings from members of the previous administration from President Trump and Mile Pompeo that it was a grave mistake, helped fund the Hamas terror operation. Former Director of National Intelligence John Ratcliffe says Biden has bolstered the Iranian regime with billions of dollars saying, “It’s not limited to this $6 billion; it’s closer to $60 billion, which undoubtedly serves to further enrich Iran”
One might also argue that President Trump was one of the most pro-Israel Presidents in US history and that Biden is one of the most anti-Israeli Presidents in history based on actions and not words. When it comes to Hamas funding all roads lead to Iran.
The Wall Street Journal headlines read, “Iran Helped Plot Attack on Israel Over Several Weeks/ The Islamic Revolutionary Guard Corps gave the final go-ahead last Monday in Beirut.” If this is proven to be true it is unlikely that the US will be able to hold back the hand of Israel and the possibility of a direct war between Israel and Iran is high. Some expect Israel will target Iran’s nuclear facilities. That creates the real risk of a global oil price shock as Iranian oil production has kept the global undersupply of oil versus demand at a minimum.
Iran’s oil exports have risen during Joe Biden’s term, with China a top buyer, as the Biden Administration wanted to appease Iran, the biggest state sponsor of terror, to rejoin the deeply flawed Joint Comprehensive Plan of Action (JCPOA). Iran for their part took full advantage. Iran’s oil exports throughout the first half of the year averaged 1.3m barrels per day which was a five-year high and the International Energy Agency (IEA) Iran’s oil production could rise from a five-year high of 3.04m bpd in June to 3.8m bpd, I guess that’s assuming that Israel does not attack them.
The conflict in a world that consumes over 103 million barrels of oil a day and produces around 100.9 million barrels a day will put more focus on the Biden administration’s misuse of the US Strategic Petroleum Reserve that according to some measurements has roughly a 17-day supply versus an average of 33 days of supply.
Today ARGUS Media is reporting that,
“OPEC has massively raised its global oil demand forecasts, noting a “pushback against the opinion that the world should see the back of fossil fuels.”
OPEC Secretary General Haitham Al Ghais said
“Policies and targets for other energies” were faltering “due to costs and a more nuanced understanding of the scale of energy challenges,” in the group’s latest World Oil Outlook (WOO). OPEC now sees oil demand continuing to grow over the next two decades, reaching 116mn b/d in 2045, from 99.6mn b/d in 2022. And even then it sees a “potential to be even higher.”
The latest forecast represents an upwards revision of 6.2mn b/d compared with last year’s WOO which had oil demand at 109.8mn b/d in 2045, the same as 2040. Opec’s projections are in stark contrast to those of the IEA which forecast oil demand to peak by 2030 in its medium-term outlook on the oil market back in June.”
It’s clear from a supply and demand standpoint that the loss of Iran’s oil production and exports would leave the world short. Iran accounts for 3% of supply but that is huge in a world where we currently have a supply deficit. The only country that might be able to make up the difference would be Saudi Arabia, but it is unclear whether they would do so.
Reports say that, “OPEC Oil ministers took the opportunity to review market conditions and agreed to continue consultation with all OPEC plus countries, through already established mechanisms …. and reaffirmed their commitment to the decisions made on 5 June 2023 in addition to their collective and individual voluntary production adjustments. Furthermore, the ministers reiterated the willingness of the Declaration of Cooperation (DoC) countries to take additional measures at any time in their continued efforts to support market stability, building on the strong cohesion of the OPEC plus countries.” Biden and the rest of the world will be under renewed pressure to try to enforce sanctions on Iranian oil, but will the Biden Administration have the guts to do that ahead of an election?
Normally we would have liked to have seen the US oil producer make up the difference but because of the Biden administration’s war against fossil fuels, they have been in retreat. Friday, Baker Hughes rig count showed more contraction. Reuters reported that, “U.S. energy firms this week cut the number of oil and natural gas rigs operating for a third week in a row for the first time since early September, energy services firm Baker Hughes (BKR.O) said in its closely followed report on Friday. The oil and gas rig count, an early indicator of future output, fell by four to 619 in the week to Oct. 6, the lowest since February 2022. Baker Hughes said that puts the total rig count down 143, or 19%, below this time last year.
U.S. oil rigs fell five to 497 this week, their lowest since February 2022, while gas rigs rose two to 118. In the Permian formation in West Texas and eastern New Mexico, the nation’s biggest shale oil basin, drillers cut three rigs this week, bringing the total oil and gas count down to 309, the lowest since February 2022, according to Baker Hughes. Those who say that the Biden administration has not restricted US oil production only need to talk to people who work in the industry who disagree. There are estimates that US oil production would be 2.0 to 4.0 million barrels a day higher if Biden had not put on drilling restrictions and slow-walked approvals and a historic number of executive orders directly aimed at US oil and gas producers.
Traditionally, prices pop and then drop on these types of work, threatening the bottom line although this market is under-supplied regardless of the war. The risk that the market will become more undersupplied could mean we could retest the old $ 95-a-barrel resistance. There is an outside possibility that if we ever take out that $95 resistance, we could see a quick shot up towards triple-digit oil. The monthly chart then is targeting as high as $111.00. But before we get to that point, we have to be prepared for some wild swings over the next couple of days. We also must watch the newswires because we’ve already seen headlines on new attacks and troop amassment and that can move the market up and down very quickly.
The impact on oil products is also high. We’ve seen gasoline and distillate fuel surge in overnight trading. We’ve been warning you to use market weakness to put on hedges and we think it’s even more imperative that if you do get any breaks, use that opportunity to protect yourself from what could be a major oil price spike.
There has been a lot of talk about demand destruction. Last week’s weekly gasoline demand number obviously was incorrect. That should be adjusted big time this week. The truth of the matter is that the so-called demand destruction that people have thought they have seen has not happened yet. That is s not to say that it won’t happen. Generally speaking, demand destruction happens when we see a huge price spike, not when oil prices move up in a rather orderly fashion.
Obviously, the possibility of a price spike that can cause demand destruction is higher today after Hamas’s attack on Israel than it was before. Still, don’t be short on the assumption that demand destruction suddenly is going to hit. If a full-fledged war breaks out, demand for oil will be very high.
Reports are saying that Russia resumed seaborne diesel exports after partially lifting the ban on diesel exports.
Natural gas is also continuing with its upside breakout. EBW Analytics says that, “After an early-week head-fake lower, the long-awaited seasonal rally for natural gas took hold as October weather regained 22 gHDDs, production appeared to dip lower to start October, and LNG feedgas swelled higher as Gulf Coast temperatures cooled.
While the short squeeze may linger near term, technicals are overtly bullish, and the 1-15 day outlook added another 5 gHDDs over the weekend, a fundamentally soft medium-to-long-term outlook for natural gas remains the most-likely scenario when near-term cold ebbs.