Oil supply and transportation risks are rising just as the world is on the cusp of a global supply deficit. That combination will make it very dangerous to carry short positions on oil or products. Supply draws should start this week and will further push inventories into the below-average territory for this time of year. This comes as Iran seems determined to challenge the weak Biden administration that so far has allowed Iran to get away with murder.
China is also flexing its muscles in Taiwan as President Xi Jinping vowed on Tuesday to resolutely prevent anyone from “splitting Taiwan from China in any way” according to Reuters. The results of the Biden administration’s foreign policy have allowed our adversaries to act out in ways that would have been unthinkable just a few years ago.
This is especially true when it comes to Iran being allowed to get away with supporting Hamas and its terror attack on Israel. Iran also is supporting the Houthi rebels both financially and logistically, allowing them to attack ships and disrupt global shipping lanes.
The latest outrage is Iran’s support of Hezbollah again attacking a US base in Iraq and seriously injuring a US serviceman as well as injuring others. U.S. forces in Iraq and Syria attacked more than 100 times in 2023 and the Biden administration’s weak responses to these assaults have only encouraged more attacks.
Iran has also tripled its production of uranium just below weapons grade according to the International Atomic Energy Agency which shows that the Biden administration’s appeasement of Iran did not stop their quest to get a nuclear weapon. They are probably staying below the threshold just long enough to coax the Biden administration out of more billions.
It was reported that The USS Laboon, a guided-missile destroyer, and an unspecified number of F-18 fighter jets shot down 12 attack drones, three anti-ship ballistic missiles, and two cruise missiles that the Houthis launched over 10 hours. Yesterday the Houthi still hit a container ship in the Red Sea with missiles causing oil to pop.
Despite an increased US defense presence, the Houthi rebels still control the west of Yemen, including its Red Sea coast, and will continue to launch attacks. Yesterday a Houthi military spokesman said that they hit a United Commercial ship in the Red Sea with missiles after it rejected warning calls allegedly. They also claim to have carried out drone attacks against Israel’s EILAT and other areas in what they call occupied Palestine according to them.
Shipping companies will continue to avoid the Red Sea even as Denmark’s Maersk said that it was preparing to resume some shipping operations in the Red Sea and the Gulf of Aden, the company said on Sunday, citing the deployment of a U.S.-led military operation designed to ensure the safety of commerce in the area.
The US did buy 3 million barrels for the SPR this week and while that needs to happen especially in a world where the risk to supply is high, it will not help cover for the commercial inventory drawdowns that are ahead. Tonight we get The American Petroleum Institute report that should start to see the supply drain begin.
Argus Media is reporting that a well-supplied heavy crude market in the US Gulf Coast could flip to a shortage later in 2024 as the expected start-up of major downstream operations in Canada and Mexico pull supplies from the Gulf Coast. That will force refiners to seek alternative grades from Latin America.
It is also a reason that the Biden administration is turning a blind eye to Venezuela’s assaults on democracy. President Nicolás Maduro of Venezuela failed to follow through on his promise of allowing free and fair elections which was a reason that the Biden administration allowed them to export more oil. Yet there are no consequences because they fear a potential diesel shortage. This is a reminder of how the Biden administration reduced pressure on Iran allowing them to reap billions in oil revenues so they can fund the oil insecurity that we are seeing around the globe.
Yet with some forecasters predicting a big change in the weather, the shortage of distillate inventory around the globe is raising huge concerns the Biden administration doesn’t want to risk losing supplies even if it means allowing Venezuela to get away with destroying democracy in their country if it means another price spike at the pump ahead of the election. While the Biden team loves to talk about “saving democracy” these actions do not back the talk.
The other issue when it comes to tight diesel suppliers happens to be the Biden administration’s regulatory environment. Argus Media is saying that Southern US midcontinent diesel prices may rally during next year’s fall harvest season as potential changes to regional gasoline specifications could reduce the region’s production capacity for diesel production.
They say that eight US midcontinent states — Illinois, Iowa, Minnesota, Missouri, Nebraska, Ohio, South Dakota, and Wisconsin — filed a petition to rescind the longstanding Reid vapor pressure (RVP) waiver for 10 percent (pc) ethanol in gasoline, which would lead to the reformulation of the blendstocks used to produce both 10pc and 15pc blends.
The US Environmental Protection Agency (EPA) in March this year proposed approving the request from the eight states with an effective date of 28 April 2024. Still, the EPA has not made a final official ruling. The potential gasoline shift could increase gasoline output while reducing diesel production.
Additionally, the shift could create difficulties for pipelines transporting supplies of diesel throughout the region, Magellan pipeline recently said in a petition to the EPA. They also say that US midcontinent gasoline prices may tick higher than normal next summer as eight midcontinent states seek to retain year-round sales of 15 percent ethanol gasoline (E15) in a proposed reformulation that could pinch regional supplies and constrain pipeline movements.
Also, we are seeing oil loadings at the Russian Black Sea port of Novorossiisk were suspended because of a storm on Wednesday, sources told Reuters.
Oil prices are pulling back after a breakout yesterday as traders try to assess the risks to supply. Holiday weakened volume continues to be lighter than normal, so we have to be on guard for big moves.
Take advantage of any weaknesses to put on hedges going into the rest of the winter and perhaps into next year.
It would be foolish not to have some protection in a world where the risk to supply is higher than it’s been in many years. Prices may go up and down periodically, yet the potential for a price spike still very high. Better to be safe than sorry. So while we seem to be back and filling, based on the chart, it looks poised to move higher over the coming weeks.
Natural gas looks like it’s trying to come back but will need Old Man Winter’s help. Celsius Energy is saying that they believe that natural gas demand bottomed out on Sunday with an exceptionally bearish +0 BCF/d daily storage injection. Look for withdrawals to steadily rise this week, potentially climbing above the 5-yr average this weekend or early next week as a cooler—but not arctic—airmass arrives.
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