Oil prices hit another new high in this run, and the only thing we must fear is bullishness itself. Ok, maybe another round of covid or a subpar American Petroleum Institute (API) inventory report, but the real fear is that we get too bullish, too overbought, and everyone decides to run for the exits at one time. The bullish bandwagon that was a lonely place a couple of years ago is now getting very crowded. Yet the market is right about the tight market that the globe is facing, and my long-term target near $88.00 should offer resistance, but the case for oil in the nineties later in the year is looking solid.
The $100.00 per barrel predictions made last year should only be correct if we get a major event in a rising interest rate environment, but the way things are going in the world right now, that could very easily happen. China cuts rate, and the world seems to be a more dangerous place from a geopolitical aspect.
Crude oil prices got mixed signals from Joe Biden’s rambling press conference as he kind of suggested that he might do something to try to rein in oil and gasoline prices. He suggested that his recent foray into releasing oil from the Strategic Petroleum Reserve helped decrease gas prices. Of course, people in the oil industry know that is not true. It was the omicron scare that brought down prices. If anything, the release of oil from the reserve probably will be a catalyst for raising prices. Releasing a bit of oil into a demand-driven tight market will only cause demand to surge. Besides, almost none of that oil found its way to U.S. refineries and was shipped off to places like China, Japan, and South Korea.
Yet the Biden also said that he expects that Russia will move into Ukraine in what he thinks will be a minor incursion that he will regret. Biden warns Russia of ‘Disaster’ if it invades Ukraine. Biden said he suspects Russia will invade but doesn’t think Putin has made up his mind. Yet any incursion, especially one where it would be foolhardy to predict it would only be minor, could have significant risk to Europe’s energy supply. Biden’s track record of predicting the way things would go in military operations has never been that accurate. Afghanistan sadly is the most recent example.
Biden did suggest there was some progress in the Iranian nuclear talks but was kind of fuzzy on what that progress really was. Of course, Iran continues to sell oil to China. It has been reported that Iran has been boasting lately that it is defeating the sanctions, selling much more oil than in 2019-2020, implying that it does need to make a concession at the Vienna talks. So China’s increased volume of imports of Iranian oil and its official admission in customs data provides diplomatic leverage to Tehran.
Estimates are that oil exports topped 600,000 barrels per day in 2021 compared with around 200,000 in 2019 and the first nine months of 2020. Imports from Iran have accounted for about 6% of China’s crude oil imports, according to shipping data and trader estimates.
The crude oil market did get a boost after the Wall Street Journal reported that China cut its benchmark interest rate to bolster its flagging economy. The country’s central bank stepped in to support a slowing economy that a slump in the property market has weighed down during a politically important year for leader Xi Jinping. China cutting rates as the U.S. raises them is going to be an interesting scenario, but as long as the U.S. dollar does not get too strong, it should be bullish for oil demand.
The API report failed to inspire more bullishness. The API showed a surprise 1.404 million barrel crude build and another large 3.463 million barrel increase in gasoline supply. Too early to tell whether this is usable gas or components. Distillates did fall by 1.496 million barrels. Because of the holiday, we get the EIA natural gas report at 9:30 central time and the petroleum status report at 10:00. The numbers need to be more bullish than API to give oil a lift. Look at gas demand to see if that ticks back up while distillate demand is expected to be solid.
Natural gas continues to move on weather and political developments in Europe. We should see a 200 plus withdrawal today from the EIA.
We continue to be bullish but be on guard for corrections. Look for breaks to position and hedge.