Tanker Trap. The Energy Report 07/22/19

Iran’s seizing of a UK oil tanker as well as a report by the U.S. military accusing a Venezuelan fighter aircraft of “aggressively” shadowing a U.S. Navy EP-3 Aries II plane over international airspace, created a bear trap for oil traders. Iran’s tanker tit for tat, that started with the UK seizing an Iranian tanker, now is raising risk factors for the global oil market as tankers from the UK are being told to avoid the Strait of Hormuz. Longer routes mean higher prices and slower delivery times.  The rising geopolitical risk is a major factor. The UK and the U.S. both want to avoid a war with Iran but the risks keep going higher as Iran continues to act more desperate.

Speaking of desperate, let’s talk about Venezuela. For some inexplicable reason, a Venezuelan pilot flying a Russian made jet buzzed a U.S. jet.  Venezuela’s military claimed the U.S. jet was in their airspace and was violating “security of air operations and international treaties.” This comes as the U.S. drilling Activity Reports is also showing a big drop in Permian Basin oil production, raising concerns about the U.S. oil production outlook.

Forbes points out a major slowdown U.S. shale oil growth. In its most recent Drilling Productivity Report, each of the six regions tracked by the Energy Information Administration (EIA) — Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian — still showed a year-over-year increase in oil production. However, if we look at the year-over-year gains over the past few years, there has been a noticeable slowdown in oil production growth. This slowdown is particularly pronounced in the Permian Basin. The most recent estimates in the Permian are that year-over-year production is growing today at just over half the level of a year ago. Production growth there has been in rapid decline since peaking a year ago.

That comes as the Baker Hughes rig counts continue to fall. They reported that U.S. oil rig count fell -5 to 779 last week and has fallen by an average of -2.5 per week over the last four weeks. The count is now down -8.7% compared with last year.

The Increasing geopolitical risk and shaky output from the Permian should help solidify a bottom in oil. Technically, oil may try to retest recent lows but if they do, that should hold and that will signal a major bottom for oil.

Oil inventories should show big draws this week but with the recovery from Tropical Storm Barry, the numbers may provide some crazy surprises. Still the trend of inventories should be substantially lower. Oil Product demand should continue to be solid. Both ultra-low diesel and rbob gasoline should be bought on breaks

The oppressive heat wave is giving natural gas a slight bid this morning. Still record production of Nat gas is keeping us in a tight range

Thanks to all of you who attended Trade Expo Chicago! It was great to see you and meet you! I hope to see all of you at the San Francisco MONEYSHOW next month!
Phil Flynn

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Call to get set up for trade levels at 888-264-5665 or email me at pflynn@pricegroup.com.