One week closer to November 1 when sanctions are imposed on Iran’s oil production, and markets are starting to take notice. Countries are beginning to fall in line with compliance, fearing the economic woes resulting from continued trade with Iran. While some groups, such as the EU, are searching for workarounds, the sanctions will still have a notable impact on global oil supply. The US has announced it will not use the Strategic Petroleum Reserve to offset the loss, and OPEC has been hesitant to officially boost production.
The resulting shortage of supplies is causing markets to increasingly eye $100/bbl as a target for crude in the latter months of the year. Several investment banks have upped their 2019 price targets, and oil major Total recently noted it sees $100 on the horizon. What affect this could have on the global economy is yet to be seen – while major economies are still feeling robust growth, developing nations are more fragile and could see negative repercussions from high oil prices.
This week’s EIA report was largely uninteresting for the market. While it did confirm refinery maintenance season is underway, the builds and draws of various products were moderate and uninstructive for markets. Markets will be closely watching global inventories to see how Iran’s reductions are impacting the market, but the US’ data may not be the best place to look for that affect.
US inventory reports are typically the focal point of global trading, given the transparency and accuracy of the data. However, our relative isolation from the impacts on Iran’s oil market make our inventories less indicative of global trends. While oil is fungible and a supply outage anywhere affects prices everywhere, the impact may not be symmetrical everywhere. US does significantly more trade in our hemisphere than with Eurasia, so our inventories may not be as tight as our global corollaries. As a result, Brent (European) crude prices are currently trading at a $10 premium to WTI crude, up from the $7-$8 range it’s been in lately.
Crude prices began the week at $71.14, after rising steadily last week. The strong opening set the tone for the week, with prices remaining above $71 throughout the week. Although prices dipped lower on Wednesday after the EIA’s report, they regained strength in the latter half of the week. Crude oil opened this morning at $72.18, a gain of $1.04 (1.5%) for the week.
Diesel prices have experienced huge gains this week, boosted by a stock draw reported by the EIA. Diesel began the week at $2.2275, quickly making the leap to $2.30 during the week. This morning, prices opened at $2.3218, a gain of 9.4 cents (4.2%) – far outpacing crude’s gains this week.
Gasoline gains also outpaced crude this week, as both are tracking more closely to Brent prices than to WTI. Keep in mind that NYMEX fuels are deliverable to NY Harbor, where barges from Europe make up a significant portion of supply. NYMEX Crude is based on Cushing, OK – far away from any European imports. Gasoline opened the week at $2.0210, rising slightly higher in the beginning of the week before really taking off in the latter half. Gas prices opened this morning at $2.0848, a gain of 6.4 cents (3.2%).