Oil prices have reached a critical danger point as selling comes in on fears of a slowdown in economic growth. Recent increases are giving the market a sense of security that supplies will be more than ample to weather whatever comes. Yet, the market’s complacency about where we are with supplies is based solely on the belief that global demand will slow, something that may not happen. If it does not happen, the globe will be facing a global supply versus demand deficit.
Demand for oil products right now are at a record high and with the upcoming sanctions on Iran, users of oil products need to get hedged. Refiners are going to start to come out of maintenance and this refining season should see a surge in refining demand met by declining supply and the real possibility of oil prices spikes. The challenge to meet that demand in the futures is going to leave the oil market the tightest we have seen in over a decade. Reuters reported that Russian Energy Minister Alexander Novak said on Saturday there was no reason for Russia to freeze or cut its oil production levels, noting that there were risks that global oil markets could be facing a deficit.
We fear that the recent selloff may have some users under hedged at a time when risks to the upside remain high. We have already heard from many airlines, American for example, that saw their earnings impacted by high fuel costs and being under-hedged. Other companies have been hurt by predictions of lower for longer as complacency set in and by being swayed by the correction of the moment and not focusing on the big picture. The correction in oil and especially in distillate should be viewed as a great opportunity to get hedged ahead of winter. If the economy does slow, it is still better to be safe than sorry.
Reuters is reporting that three of Iran’s top five customers – India, China, and Turkey – are resisting Washington’s call to end purchases outright, arguing there are not enough supplies worldwide to replace them, according to sources familiar with the matter. Reuters says that pressure, along with worries of a damaging oil price spike, is putting the Trump administration’s hard line to the test and raising the possibility of bilateral deals to allow some buying to continue, according to the sources.
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