Oil prices are having a technical breakdown even though we saw some bullish data from the American Petroleum Institute (API) and a reduction in gas supply to Europe from Gazprom (MCX:GAZP). Reports are that flows have fallen to zero and continued talk that OPEC is pulling back from its threat to cut production along with rumors that the U.S. may be inching closer to reentering the JOCPA nuclear deal with Iran. To add insult to injury, U.S. consumers dared to feel confident, according to the Conference Board as its index surged to 103.2 this month from 95.3 in July, much higher than the 97.7 forecast. The Jolts job openings came in at 11.24 million for the month, well above expectations of the 10.3 million openings forecast. The good news is bad after Fed Chairman Jerome Powell, who signalled that he would bring down inflation at the expense of economic growth. These data points seem inflationary at this time.
Yesterday, oil plunged on reports that the U.S. was close to securing a deal with Iran on the JCPOA. One of the reports came from a former International Atomic Energy Agency official. The reality is that no one in the State Department confirmed or denied the story. The story came from “Iran International,” which reported it. They wrote, “Tehran and Washington have agreed to restore the 2015 nuclear deal and will announce terms in two to three weeks, a former IAEA official told Iran International. Speaking Tuesday, the once senior official at the International Atomic Energy Agency, who is close to the United States government, said President Joe Biden had resolved to take the step in advance of November’s mid-term Congressional elections. The official said Washington had informed Israel of the decision, and that four Arab states – Egypt, Jordan, Saudi Arabia and the United Arab Emirates (UAE) – had been told during Biden’s July Middle East tour that the U.S. would help them develop nuclear technology. While the Israeli leadership has consistently opposed the 2015 agreement, the JCPOA.”
This morning Iran’s foreign minister Abdollahian said, “We’re working on stronger guarantees in the text of the JCPOA." He said that the International Atomic Energy Agency should drop its politically motivated demand about Tehran’s nuclear activity. He also says that Iran seeks stronger guarantees from EU for the revival of the 2015 deal.
That does not seem like we’re close to a deal, but the market seems to think otherwise. While some unnamed sources at the State Department denied the story, for oil traders, where there’s smoke, there’s fire.
A resumption of the Iran nuclear deal could be a game changer in the short term for crude prices as the market is assuming that Iran can add 1 million to 1.5 million barrels of oil a day. While I believe that may be on the high side, there is a lot of oil and storage, and it’s unclear how quickly Iran will be allowed to come back on the market assuming that the deal was inked. At this time, this deal is an overhang on prices. My expectation is if they get a deal, it will be bearish for oil in the short term, but prices would soon recover after a steep drop.
While some unnamed sources seem to suggest yesterday that Iran’s production cut was not under consideration at this week’s OPEC meeting, perhaps this oil-price drop may change their minds. This morning, OPEC’s Joint Technical Committee reported it sees an increase in the oil market surplus – from 600,000 barrels a day to 1.4 million barrels a day in November. They also see the 2022 oil market surplus at 900,000 barrels a day, and that is up 100,000 barrels a day from the previous forecast. These numbers would suggest that OPEC is laying the case for a production cut if not at this meeting, then at a meeting very shortly. The 32nd OPEC and non-OPEC Ministerial Meeting will be on Sept. 5. Moreover, at the same time, OPEC is warning that rising costs of energy may lead to a significant reduction in consumption towards the end of the year.
The supply data from the American Petroleum Institute (API) was bullish and it makes one wonder what would have happened to the market if it were bearish. The API reported that crude supplies increase by only 593,000 barrels. We saw a huge drop in gasoline supplies of 3.414 million barrels and that is very supportive and suggests that the so-called gasoline demand destruction hasn’t been happening to the extent that the market has priced in. Distillate inventories also fell by 1.726 million barrels and is not very encouraging as we head into winter.
The oil market breakdown leaves us vulnerable to test near $85 a barrel. The market should hold at that point. Keep an eye on the news because that’s been driving the market the last couple of days. If it appears that OPEC is going to lean towards a production cut, we could see a sharp recovery. Also, if we see a denial of the Iranian deal, it could also lead to recovery. If we do get into the Iranian deal, be prepared for more volatility and weakness. But after that, sell-off should be a solid bottom.
Natural gas also saw some weakness on high volatility. The weakness in oil seemed to cause profit-taking in natural gas. The market still must be aware of tropical storm activity in the Atlantic, but for right now, the markets focus on demand weakness.