Fear Takes a Holiday - The Oil Report 6.28.16

After the Brexit bash, global markets are trying to steady themselves as the historic shockwaves of the Brexit vote will continue to cause unease in global markets. The fact that Brexit will actually happen anytime soon is allowing the market to try to act more normal even as everything in the world has changed. Speculation that somehow Brexit can be undone along with the hope of more accommodative central banks around the globe, will allow markets to focus on current fundamentals as opposed to what may or may not happen in the future. The pullback in the safe haven dollar trade should also help the cause. Still, to think that the Brexit fall-out is over would be wishful thinking but today we might focus on the good old fashion supply and demand fundamentals.

While concerns about a recession may lower oil demand expectations, the global market shock mat actually hurt production more. Oil companies that might try to be optimistic about spending money on wells and rigs may think twice while the global economy starts to sort the Brexit exit. 

In the meantime, oil should be getting support from reports that supplies of oil in the U.S. may start to fall. Genscape, the private forecaster, reported that supply at the Cushing, Oklahoma delivery fell by 1.32 million barrels. This shows that we are still seeing strong demand and perhaps the remnants of the loss of supply from the Canadian wildfires.

To add to the bullish case, it seems the odds of a Norwegian oil strike is rising. Reuters is reporting that about 755 Norwegian workers on seven oil and gas fields could go on strike from Saturday, hitting output from the North Seas top producer, if a new wage deal is not agreed before a Friday deadline. A final round of mandatory talks will be hosted by a state mediator on June 30 and July 1 in an effort to avoid disruption that could start the following day. The affected fields account for nearly 18 percent of Norway's oil output and a little more than 17 percent of its natural gas.

Of course the fear in the market in the aftermath of Brexit is that more countries might be inspired to call for referendums. But who would have ever thought that Nigerian rebels might be inspired by the Brexit vote. Newsweek is reporting that the, “militant group in Nigeria’s oil-producing hub, the Niger Delta, has called for a Brexit-style referendum on the region’s status within Nigeria. The Niger Delta Avengers (NDA), which has launched a series of attacks on oil pipelines in southern Nigeria since February, said via its Twitter account on Saturday: “President [Muhammadu] Buhari, borrow a leaf from PM David Cameron, call for a referendum and let Nigerians decide like they did to vote you into power.” The U.K. voted to leave the European Union in a closely fought referendum on Thursday. As a result of the vote, David Cameron—who campaigned for Britain to remain in the EU—resigned as prime minister, a decision Nigeria’s President Buhari described as a “demonstration of courage by a democratic leader who respects the will of the people, even if he didn’t agree with their decision.”

In the meantime, a ceasefire seems to be holding in Nigeria. Reuters is reporting that oil production in Nigeria has risen to about 1.9 million bpd from 1.6 million bpd due to repairs and more than a week having passed since a major pipeline attack in the Niger Delta, a state oil company spokesman said on Monday.

All and all oil is recovering but we feel that we may see one more attempt to go lower. Long term we maintain our bullish outlook and would use the turmoil to by long dated call options. We may also start buying breaks in the back end of the crude curve. Of course in the current volatility we may go short or long depending on where we are at that time. With constantly changing market conditions stay in contact

Gas prices have been down and AAA is predicting a record breaking holiday weekend when it comes to demand. Triple AAA is saying that with gasoline prices at their lowest pre-July 4th levels since 2005, a record 43 million Americans will take a trip this holiday. Eighty-six percent of travelers will go by car, according to AAA.

Natural gas continues to trend higher as a return to hot temperatures and falling production will test our ideas of adequate storage. Only 86 natural gas rigs are in operation and many wells are being depleted so we will see U.S. natural gas production fall. This will come at a time when we will see record demand in the coming weeks. We may actually see a withdraw in supply in the coming weeks or at least fail to come even close to the five-year injection level in the foreseeable future. If the heat predictions hold true, we are poised for a big price spike.


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