Oil prices are cautious as the siege of Gaza unfolds. Hamas is threatening to kill hostages if Israel attacks any Gaza homes, so the stakes are high and the world needs prayer. This comes against a backdrop of a surging bond market and a retreat in the dollar that should set the stage for some upside on commodities.
There are reports of a potential new Chinese stimulus package and talk that they would be open to running a higher deficit to achieve their target growth rate. That gave most commodities a little boost. Yet for oil, there is trepidation that perhaps this conflict will not impact the oil supply. The key to that may be evidence of the direct involvement of Iran. The Wall Street Journal has reported that Iran helped plan the attack, but Iran’s Supreme Leader Khamenei denied it this morning.
Regardless of Iran’s direct involvement, the world knows they are a major financial backer and supporter of Hamas. Now with the horror we have seen online, there is shock and anger across most of the United States because of the way Hamas carried out its terror. Killing innocent civilians at a music festival taking children as hostages putting them in cages torturing people and showing it on internet feeds. That along with Iran’s suspected involvement will make it almost impossible for the Biden administration to try to normalize relations with Iran.
The Biden administration will be forced to crack down on Iranian oil sanctions that they have turned a blind eye to in recent years. They have tried to appease Iran’s leadership and move them back into the deeply flawed JCPOA nuclear deal. Under Biden, Iranian oil production and exports are at a five-year high. As Javier Blass points out at current prices Iran is making 15 billion dollars a month with their oil exports.
And while Biden allowed Iran to make money by raising output, in the US he was busy accusing the US oil and gas industry of being “war profiteers” and “price gougers”. He killed the Keystone XL pipeline put on a drilling moratorium and threatened lawsuits against US oil and gas companies. Biden also pressured banks to stop funding US oil and gas operations while helping Iran and Venezuela get back into the oil production game.
Now from a supply and demand standpoint, the world is more dependent on Iranian oil. That is because global oil demand is at a record and it is going to be almost impossible to fill that void of the loss of Iranian oil supply. And even though Iranian oil production is just about 3% of daily consumption, there is no spare capacity around the globe to make up for it. Oh Yes! The Biden administration leaked a story that they were making progress in negotiations with Venezuela to provide sanctions relying on some of their oil but Venezuela in the foreseeable future cannot fill that void. On top of that do we need to appease another rouge regime?
Iranian oil exports of course fund the Iranian regime. If you’re going to make Iran responsible for their actions in spreading terror, then you’re going to have to shut down their oil exports. The problem for the Biden administration is that in the short term, there is no spare production capacity in the globe other than within the OPEC cartel. It is unlikely that Saudi Arabia or Russia will look to raise production to try to offset the loss of Iranian oil. So even if there is not a direct attack on Iran, the risk to Iranian oil is high as I assume that sanctions are going to have to be enforced. Justice will demand it.
But the volatility that we’re going to see in a while is going to be based more on emotion and fear than it is going to be for the next couple of days. Before this conflict, we saw a sharp drop in oil from the key $95.00 resistance point. There was a perception at that point that interest rates were going to go up and the economy was going to go into a recession. We believe that the sell-off was way overdone. The reality is that we still have a supply deficit.
Today we will get a report from the American Petroleum Institute that most likely is going to show a big drawdown in petroleum inventories. We expect that gasoline inventories will drop by at least 3 million barrels this week. I also expect to see a similar draw in products.
The other catalyst for the sell-off was a huge surge in gasoline supplies last week as reported by the Energy Information Administration. I don’t know if you noticed but the week before everybody just parked their car in the middle of the road or maybe everybody bought an electric car. But today we will get a reality check and more than likely we’re going to see a huge drop in gasoline supplies and we’re going to see a huge surge in oil demand and gasoline demand.
You might also find it interesting that the gasoline demand in Spain and Italy rose to an 8-year high. That was according to JODI.
Yet despite Biden’s anti-fossil fuel agenda, the US shale community continues to rise to the occasion. According to Woods Mackenzie, six US E&P companies have raised full-year 2023 production guidance during the current earnings season and linked their adjustments to stand-out performance. So in other words, the private sector is using innovation to improve oil production despite the fact that the Biden administration wants to pressure them into shutting down.
We know that Robert Kennedy who announced his independent bid to run for president has said he wants to totally shut down fracking in the United States. Obviously, I don’t think he fathoms what a strategic mistake that would be.
We cannot emphasize the potential upside risk in the coming weeks and months while the markets equivocate about the impact of this war. Use the weakness to lock in prices for a big move at some point. The EIA U.S. crude oil exports in the first half of 2023 averaged 3.99 million barrels per day (b/d), which is a record high for the first half of a year since 2015 when the U.S. ban on most crude oil exports from the United States was repealed. In the first half of 2023, crude oil exports were up 650,000 b/d (19%) compared with the first half of 2022.
Natural gas prices have had an incredible run-up on major resistance. There is a possibility that the market could break out to the upside depending on the weather but be prepared for a bit of a pullback as we’ve had an incredible run.