Saudi Arabia is set to pump 10.5M bbl/day of crude in Q3, a 1M bbl/day increase over Q2's average production and its highest quarterly level of sustained production since at least the early 1980s, energy consultancy PIRA says.
With Libyan production at its lowest level since 2011, Iranian supply constricted by sanctions, and unreliable output from countries like Iraq and Nigeria, it's "the tightest physical balance on the world oil market I've seen for a long time," PIRA CEO Gary Ross says. "There really is very little flexibility left in the system."
Without U.S. shale, Q3 global supply would be short ~1.5M bbl/day and prices would be dramatically higher, Ross adds.
Linking Syrian strongman Bashar Assad or his inner circle to the recent chemical weapons attack is no "slam dunk," according to several U.S. officials, reports the AP. The intercept of Syrian military officials discussing the chemical strike was among low-level staff, say the sources, with no direct evidence tying it even to a senior commander, let alone Assad.
Maybe of more concern is who actually has control of Syria's chemical weapons stores. A report outlining the evidence against Assad says the intelligence community no longer has the same certainty it had 6 months ago as to where the regime's chemical weapons are stored.
Separately, the NYT reports U.S. officials as saying there's no "smoking gun" linking Assad to the attack.
This walking back from the ledge of military action is maybe helping stocks, with the Nasdaq 100 (QQQ +1%) and S&P 500 (SPY +0.5%). Gold (GLD -0.7%) and oil (USO -0.2%) fall back.
Brent crude oil, already at six-month highs of ~$117/bbl, likely will rise towards $125 if the West launches air strikes against Syria and could spike as high as $150 if the conflict spills over into the rest of the Middle East, Societe Generale analysts say.
The big worry is Iraq: "The Sunni vs. Shiite conflict in Syria has a direct parallel in Iraq, and the violence in Iraq has reached levels not seen since 2008," SocGen's global head of oil research writes.
Don't forget Libya: While the headlines focus on Syria or speculations about the Suez canal or the Strait of Hormuz, the current supply disruption in Libya is as real as in 2011, analysts say.
Missile strikes could be launched "as early as Thursday," senior U.S. officials tell NBC, and last for "three days." The strikes would be limited in scope and aimed at sending a message to the Assad regime, they say.
U.K. PM Cameron has recalled Parliament from vacation for a Thursday vote on a proposal for action. U.S. Defense Sec. Hagel tells the BBC the U.S. military is "ready to go" with any action ordered by the White House.
Oil adds to its gains, WTI crude +2.4% to $108.50. USO +2.1%.
Moving along with the precious metals over Syrian tension is crude oil, with both WTI crude (USO) and Brent (BNO) up more than 1.6%. WTI at $107.50 per barrel is threatening to take out levels last seen in the Spring of 2011.
The greenback is also catching a bid, moderately higher against the euro (FXE), cable (FXB), and the loonie (FXC), but sharply higher vs. the aussie (FXA). The dollar is losing a good bit of ground against the yen (FXY), and off just a bit vs. the Swiss franc (FXF).
Iran's state-run oil company is bullish about its ability to actually raise production, and the new oil minister - who served in the role from 1997 to 2005 - is welcomed as a respected figure who will remove politics from production.
Raising production likely would require the return of western oil majors Statoil (STO), Total (TOT) or Eni (E) that quit Iran when sanctions hit.
Also: A gap in U.S. law has allowed China to import nearly $500M of additional oil products from Iran this year while avoiding sanctions.
China is on track to overtake the U.S. as the world’s largest crude oil importer, likely drawing most of its supplies from Middle East producers, according to consulting firm Wood Mackenzie.
China’s oil imports should rise to a rate of 9.2M bbl/day by 2020 from 2.5M in 2005, and spending ~$500B annually on oil imports, while U.S. imports will fall to 6.8M bbl/day from a peak 10.1M in 2005.
Between 2005 and 2020, OPEC's share of Chinese oil imports is expected to rise to 66% from 52% percent.
Know your ETF. The United States Oil Fund (USO) has returned just 0.6% annualized over the last 3 years even as WTI has gained 30%. The reason is its reliance on the futures market. With the market in its normal state of contango (out prices are higher than near prices), buy and hold gets creamed as contracts are rolled over.
USO's strong performance this year has much to do with a futures market in "backwardation" - near term contracts are priced higher than longer-term ones. Unless you believe it's going to continue - and Newedge's Robbert van Batenburg says backwardation is extremely rare in WTI oil - it may be best to leave USO to the fast-money crowd.
Oil funds that might enjoy a return to contango include USL and DBO, but perhaps the best way to play is through oil companies which benefit from a market allowing them to sell forward at better prices. The SPDR S&P Oil & Gas Exploration ETF (XOP) is an interesting ETF candidate.
U.S. crude oil is trading above Brent, topping $108/bbl and erasing a discount of more than $20 in five months. Shale oil was supposed to usher in an era of low prices, but prices will be supported while Gulf of Mexico refiners are prepared to pay even more for crude, as Reuters reports. The refineries are processing record amounts of crude and reaping the benefit from strong margins on products sold overseas.
Crude oil futures weaken following an unconfirmed report that the 400K bbl/day Seaway Pipeline has been shut down. Flows from Seaway and other pipelines have been key in drawing down crude from the Midwest hub in recent weeks and sparking a jump in prices. Seaway is a 50-50 JV between operator Enterprise Products Partners (EPD +0.8%) and Enbridge (ENB +1.9%).
Not participating in a big broad commodity rally is oil (USO, BNO) with a bearish IEA report offering traders an excuse to sell after a big move higher. The agency sees non-OPEC supply rising by 1.3M barrels/day in 2014, a growth rate achieved only once in the last 20 years. Drill baby, drill - the largest increase will come from the U.S., 530K barrels. Geopolitical and technical risk could dent this forecast by 500K barrels, says the group. WTI crude is off 0.6% to $105.87.
This just in - crude oil's in a bull market. Up 1.6%, WTI crude hits a new high for the move of $105.25/barrel - it's up 15% YTD and more than 30% from a year ago. Middle East rumblings may make a good excuse, but the run suggests some strength to global demand despite the curiously weak Chinese trade data overnight (which may just be a reversal of previous curiously weak data). Could the rising price put a dent in the Fed's projections of economic strength? USO +0.5% premarket.
A check of oil prices following the coup in Egypt found them little-changed until moments ago when Egypt announced a state of emergency in Suez after an attack on Sinai Airport. August WTI crude (USO) pops to $101.80 and Brent Crude (BNO) to $106.48.
All of the PowerShares DB Crude Oil ETNs are based on a total return version of the Deutsche Bank Liquid Commodity Index-Oil (the "Index") which is designed to reflect the performance of certain crude oil futures contracts plus the returns from investing in 3 month United States Treasury bills. The Long ETN is based on the Optimum Yield™ version of the Index and the Short and Double Short ETNs are based on the standard version of the Index. The Optimum Yield™ version of the index attempts to minimize the negative effects of contango and maximize the positive effects of backwardation by applying flexible roll rules to pick a new futures contract when a contract expires. The standard version of the index, which does not attempt to minimize the negative effects of contango and maximize the positive effects of backwardation, uses static roll rules that dictate that an expiring futures contract must be replaced with a contract having a pre-defined expiration date.
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