Iran may have crossed a line that may isolate them from the rest of the world. According to a report from the Wall Street Journal, “Iran said it exceeded a limit on its stockpile of low-enriched uranium set under the 2015 nuclear deal, as it sought to goad Europe, Russia and China into providing relief from U.S. sanctions.” The White House on Monday responded by saying it would keep up what it calls its maximum-pressure campaign until Tehran ends “its nuclear ambitions and its malign behavior.” It further called for a ban on any Iranian uranium enrichment. President Trump, asked by reporters what message he had for Iran, said: “They know what they’re doing, they know what they’re playing with and I think they’re playing with fire. So, no message to Iran whatsoever.” Later there was some backtracking but it is clear that if Iran continues along this path it will raise the stakes against them and increase the chances of some type of conflict.
Already there is speculation that Israel will act to take out Iranian nuclear facilities if the EU can’t get Iran back under control. Israel, of course, is the country most at risk as the Iranian regime has promised on more than one occasion to wipe them off the face of the earth. This move by Iran to cross this uranium enrichment redline is an act of desperation as the economic pressure from U.S. sanctions are really causing their economy to crash. They are begging for assurances that Europe will find buyers for their oil, yet most buyers are looking to stay far away from that oil. The Trump administration will come down hard on buyers of Iranian oil so it looks like Europe can’t help them unless they find a way to buy the oil outright. Maybe a QE for Iranian oil?
This comes as OPEC and the famous plus one Russia agreed to extend the current production cut deal for nine months. The cuts come as the market is fearful of a slowdown in the global economy, but the Saudi Arabian Oil Minister Khalid Al-Falih said that while demand may have been little weaker than expected the second half of the year demand outlook looks better. In fact, he says that he is seeing good demand amid the trade war and suggests demand could spike if the U.S. and China get a deal. The Wall Street Journal wrote “Russian President Vladimir Putin revealed that Saudi Arabia—OPEC’s de facto leader—and Russia had already agreed to maintain the output cuts at current volumes, which run at around 1.2 million barrels a day. The news left some in OPEC feeling inconsequential and overshadowed by two of the world’s largest oil producers, said OPEC officials. “I think Russia’s influence is welcome,” said Saudi Energy Minister Khalid al-Falih on Monday, responding to questions about Russia’s influence on internal OPEC matters. “I don’t think Russia is calling the shots. Russia is respectful of Saudi Arabia and has agreed to roll over after we convinced them it is the correct move for the market. Russia does not dictate to us and we do not dictate to them,” the minister said.
Oil demand in the U.S. is not experiencing any slowdown as we more than likely set another record for total product demand. We should also see big draws from U.S. oil inventory with the big refinery outage on the East coast, along with the strong record-breaking gasoline demand. Distillate and jet fuel demand will also see strength as travel and farm work is surging. I expect that we will see at least a 3 million barrel drop in oil and products like gasoline and distillate. One market watcher, Patrick Bourque expects to see the big end of the month and end of quarter adjustments that could project a 6-million-barrel crude oil draw. That type of draw will get the market moving higher as the crude inventories slipped to only 5% above the five-year average for this time of year while motor gasoline inventories are just at the five-year average for this time of year and distillate fuel are about 7% below the five-year average. With record demand, there is not a lot of room for error. On top of that many are still questioning the EIA upward adjustments of over 30 million barrels of supply that came out of nowhere.
Saudi Arabia is getting ready to restart its move towards an IPO of Saudi Aramco. Bloomberg News reports that the Kingdom is “restarting preparations for a potential initial public offering of oil giant Aramco, months after putting the planned listing on hold, people familiar with the matter said. Aramco, the world’s most profitable company, recently held talks with a select group of investment banks to discuss potential roles on the offering, according to the people. Detailed work on the IPO may pick up speed later this year or early next year, the people said, asking not to be identified because the information is private.” The Saudis are hoping of course that the OPEC cuts get Brent back to $80 so they can get a good offering price on the IPO.
Natural gas backtracked as forecasts may not be as hot as originally thought thereby lowering power generation demand estimates. On top of that, we normally get a demand dip as manufacturers slow down to celebrate the Fourth of July. U.S. natural gas production is expected to grow dramatically in the coming months.