Raging Contagion
A bearish American Petroleum Institute (API) report, as well as the continuing drama surrounding Turkey is raising fears of a slowdown in oil demand based upon fears of raising contagion coming out of Turkey. The oil market that tried to mount a major comeback yesterday was thwarted by a risk aversion in the dollar that sunk oil, as well as industrial and precious metals. Oils case was not helped, as the API reported a much larger than expected 3.66-million-barrel increase in supply and It was led by a big 1.5-million-barrel increase in Cushing Oklahoma. We did get a bullish gasoline draw, as it appears that U.S gas demand bounced back as pump prices eased. Yet, a 1.64-million-barrel increase in distillate kind of offset some on the bullishness of the gasoline draw.
Now, in a pre-Turkey contagion raging market, we would probably shake off and look beyond this report to the overall big picture bullish market fundamentals. Yet, the fears surrounding Turkey are on fire this morning and it may take a political event to stop the fear. The arrest of Pastor Andrew Brunson, the American being held under house arrest, is the reason why President Donald Trump started to put economic pressure on Turkey. If he is released, then it is very possible that the U.S. will lift sanctions on Turkey and we can go back to a more normal market. Yet, Fox News reported that Turkey, on Wednesday, rejected the U.S.' appeal for an American pastor's release from detention, Turkish media reported. Pastor Andrew Brunson's lawyer renewed an appeal on Tuesday for Brunson’s release from house arrest and for his travel ban to be lifted. Yet, Reuters is reporting that an upper court is yet to rule on the appeal, his lawyer told Reuters on Wednesday. If the upper court allows him to go free, sanctions will be dropped and what this will be is like a fire drill stress test. If they don’t release him, we may start to see some real stress and the contagion is indeed raging to other markets.
The Wall Street Journal wrote yesterday that “Sharp declines in the Turkish lira, Indian rupee and other currencies have raised the prospect of a self-reinforcing flight from riskier emerging markets. While the lira recovered slightly on Tuesday, and so did many peers, India’s currency tumbled past 70 per dollar, a historic low. Across the world, the Argentine peso fell another 2.1%, even after an emergency increase in interest rates to 45% from 40%. The unexpected price action has sparked questions over how contagious the selloff might be, even for far-flung markets.”
The turmoil is hurting demand expectations for oil, yet there are reports that big money guys are getting the larger oil super cycle. Bloomberg reports that billionaires Stanley Druckenmiller and Soros throw weight behind oil rally. Bloomberg writes that “The recovery in the oil industry is attracting some of the most recognized billionaires in money management. Stanley Druckenmiller’ s Duquesne Family Office bought 1.68 million shares in VanEck Vectors Oil Services ETF in the second quarter, the third-biggest addition to its portfolio in the period, a regulatory filing showed Tuesday. It also added the Energy Select Sector SPDR (NYSE:XLE). George Soros’s hedge fund bought energy stocks including Chevron Corp. (NYSE:CVX) Soros Fund Management’s biggest addition in the energy sector is Devon Energy (NYSE:DVN), valued at U.S. $30.8 million. The hedge fund also bought stakes in Andeavor, RSP Permian Inc. and Kinder Morgan Inc (NYSE:KMI).”
Natural gas may be running out of gas. The impressive rally backed by a record-breaking hot summer could start to reverse after we get this week’s record small injection. I am predicting that we will see only a 30 bcf increase into supply.
Oil’s big picture is still strong. While the global economic outlook is the biggest risk, we still feel that this latest turmoil in Turkey should level off soon.