Bolton Bolts. The Energy Report 09/11/19
Phil Flynn of The PRICE Futures Group - InsideFutures.com - Wed Sep 11, 8:35AM CDT

Oil prices bolted downward after a report that National Security Adviser John Bolton was fired or quit. The move came quickly as traders assumed that the departure of the Iran hawk Bolton would open the door to negotiations with the President of Iran iHassan Rouhani Iran and perhaps Nicolás Maduro in Venezuela. This could possibly lead to the unleashing of millions of barrels of oil on the world market. Yet before we start counting those barrels, let’s look at reality. Oil fundamentals are more bullish than bearish. Oh sure, the Energy Information Administration (EIA) lowered their price forecast and demand forecast but that was already widely expected. The real reason why we saw oil fall like a bolt was the departure of John Bolton.

The departure of Bolton should also tell you something about President Trump. While President Trump likes to use the strength of the U.S. military as a strong negotiating point with our adversaries, at the same time, he has shown incredible restraint in where he uses that strength. While other Presidents may have been talked into military adventures by war hawks in their cabinet, Trump has resisted military action in both Venezuela and Iran despite the fact that John Bolton and others on his team were pushing for a military response. In fact President Trump suggested that some advisors were trying to trick him into a war with Venezuela. The President called off an airstrike on Iran in response to Iran shooting down a U.S. drone because he believed that the U.S. response would not have been proportional. One can only assume that John Bolton was against those decisions that now look to be very wise at this point.

Yet the Bolton sell-off was short-lived because the oil market is a lot tighter than what many people think. Not only is the crude market in backwardation, a condition that suggests a tight oil market, but the American Petroleum Institute  (API) seems to be confirming that. The API reported a massive 7.23 million barrel drop in U.S. crude oil supply. The drop included a bigger than expected 1.36 million barrel drop in Cushing, Oklahoma and a whopping 4.46 million barrel drop in gasoline supply. The drop in gasoline signals strong demand and probably reflects the exit of those summertime blends of gasoline. The API also reported that distillates increased by 618.000 barrels.

It’s kind of funny that the weekly data that we have been getting from the EIA and the API seems to be flying in the face of the longer term predictions of recession, oil demand destruction and higher oil production projections. The EIA, in their September Short-Term Energy Outlook forecast, record U.S. crude oil production in 2019 and 2020. They say that it will largely be driven by growth in the Permian region in Texas and New Mexico. The EIA says that, “U.S. production has risen above 12 million barrels per day since January 2019.  They are forecasting U.S. oil production to average 12.2 million barrels per day in 2019, before exceeding 13 million barrels per day in 2020.”  That number is impressive and it does show that U.S. production growth is slowing.

The price forecast is also lower. The EIA reported, “Average spot prices for Brent crude oil in August were slightly below $60 per barrel. The August price reflects a decrease of nearly $5 per barrel from July and more than $13 per barrel compared with last year. This month’s forecast is that Brent spot prices will average about $60 per barrel during the fourth quarter of this year, followed by prices that will range in the low $60s per barrel through the end of 2020.”

They are also bearish on global oil demand growth. They say that, “the rate of consumption growth for global liquid fuels to fall below 1 million barrels per day in 2019 for the first time since 2011. In spite of slowing growth, global consumption will still average more than 100 million barrels per day in 2019 for the first time on record.”  By the way, that record was a number that peak oil folks said was impossible to produce just a decade ago.

For gasoline, “EIA reported that the U.S. average retail motor gasoline price was $2.56 per gallon on Labor Day. In the September STEO, EIA forecasts the U.S. average to continue its recent trend, falling in the coming months until it reaches $2.43 per gallon in December.”

The big news and the future game changer for the U.S. economy is natural gas exports. The U.S. exported a record amount of the fuel of the future. The EIA says that, “EIA expects Henry Hub spot prices for natural gas to remain below $2.50 per million British thermal units during the fourth quarter 2019, as U.S. production remains on pace for another record year. The September Short-Term Energy Outlook forecasts that prices will rise slightly into 2020, averaging $2.55 per million British thermal units for the year. “The September forecast expects U.S. natural gas inventories to recover from 2018’s lows, as record production has more than kept pace with growing demand due to the U.S. power sector, along with record-setting exports. EIA expects U.S. inventories levels at the end of October to have grown 16% in the previous 12 months, and once again exceeding the prior five-year average.”

We will never forget. We pray for peace on the anniversary of the September 11th attacks. We pray for the families who lives were forever changed and the military that continue to fight to defend our freedoms and who have sacrificed so much. God bless America.
Thanks.
Phil Flynn

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