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The Energy Report: Death of a Hardliner

Published 05/20/2024, 09:26 AM
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Iran confirms the death of President Ebrahim Raisi and Foreign Minister Hossein Amirabdollahian in a helicopter crash. 

President Raisi's legacy was one that did little to foster peace in the world nor did he seem to do anything to improve the economic conditions of the Iranian people. And the oil market at this point seems unmoved.

The oil market also seems to be unmoved and reports that Saudi Prince bin Salman had to cancel his trip to Japan because of the concerns about the health of his father the king. Reports say that Saudi Arabia’s King Salman, 88, was diagnosed with a lung infection and will undergo treatment with antibiotics, according to state media.

The oil market seems to be the commodity that has drawn the short straw as metals continue to shine. Copper prices surged above 11,000 a ton, a record high as supply shortages is finally being recognized by the futures market.

The hedge funds have pulled a lot of money out of oil and put it into other commodities. It seems that many do not look at oil as an inflation hedge. Strength in the precious and industrial metal suggests that oil will not have too far to fall.

Oil is bottoming and while the bounce out of this range has been less than impressive, it also suggests that there is limited downside as well. We like oil because we believe that the increase in demand by refiners will start to result in substantial crude oil supply draws here in the United States. We like oil because we believe that the demand from India and China is going to rise significantly over the coming months especially with China trying to boost its economy and its real estate sector that is also a reason why copper is doing well.

The reason why, according to Reuters, gasoline exports fell to the lowest level since 2015 is because of recovering domestic Chinese gasoline demand.  Gasoline demand in the United States on the other hand is still relatively weak, coming in below 9 million barrels a day for three consecutive weeks. The big question we have going forward is will the Americans get back behind the wheel and top off the tank. AAA’s gasoline prices are at 359 a gallon which is roughly a nickel higher than they were a year ago on this day.

The other question people have is why the Energy Information Administration has adjusted the US oil production number in almost a month. Some voice concerns that US shale production may be topping out in part because of the fear of stricter regulations by the Biden administration causing a pullback in oil and investment in the industry.

The other concern is that the government is now going after Scott Sheffield, founder and longtime CEO of Pioneer Natural Resources (NYSE:PXD), of attempted collision with OPEC over alleged price fixing.

Yet the government attack on Scott Sheffield, who obviously was trying to coordinate oil production with OPEC to keep fuel producers from going out of business, might be another reason why all the hostile environment in the United States oil and gas may make it less attractive to investors.

Regardless we believe that we will start to see crude oil supplies draw here in the United States. This week we are looking for crude oil inventories to fall by 4 million barrels we expect gasoline inventories will also fall by 3,000,000 barrels. Distillate inventories will fall by 2.2 million barrels. We expect gasoline inventories to show a 1.0 increase in refinery runs.

Natural gas is continuing its recovery. EBW Analytics reports that the natural gas rally extended to the highest level since mid-January as a hot forecast shift added 20 CDDs and back-to-back bullish EIA storage surprises provided support for the ongoing rally higher.

Technical presage another 5-10% of incremental upside ahead. Still, EBW says that NYMEX futures are nearing fundamental fair value as higher prices incentivize producers to return supply and higher prices catalyze power sector gas-to-coal switching. Nonetheless, momentum can carry futures above long-term fair value in the short-to-medium term.

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