Prices Are Rallying To Start Monday’s Trade As A New War In Israel Has Some Traders Nervous

After the largest weekly drop in 6 months for most energy contracts, prices are rallying to start Monday’s trade as a new war in Israel has some traders nervous that some of the world’s largest oil producers could be drawn into the conflict.  So far there are no direct impacts on oil or product supplies from the violence, but 3 of the world’s top 5 exporters are all indirectly involved, so it’s not too far of a stretch to imagine an escalation that could end up impacting supply even though the odds of an embargo like the one 50 years ago seems like a long shot at the moment. 

Iran’s oil exports had been increasing in recent months, helping to offset the impact of voluntary production cuts from Saudi Arabia and Russia, as buyers like China ignored sanctions, and the US seemed to be allowing more barrels to flow as the country was suddenly playing nice.  The early price rally suggests that any hope of normalizing relations with Iran, who has more than a million barrels/day of spare oil capacity the world could sue, have been lost after reports that they helped plan the attacks on Israel.  In addition, some reports suggest that the timing of the attacks was designed to disrupt attempts to bring Israel and Saudi Arabia together at the negotiating table. 

Money managers reduced their holdings in WTI, Brent, RBOB and gasoil contracts last week, but actually added to positions in Heating Oil (ULSD) as of Tuesday’s compilation, meaning that large speculators had the most money bet on higher diesel prices as they’ve had in 2 years, just in time for prices to crumble by 50 cents/gallon.   It was hard to imagine that we won’t see some liquidation of those positions in the next CFTC report given the big sell off after the last report was compiled, and now we’ll also see whether or not the big funds are buying the violence as a long term threat to supply.   

Baker Hughes reported another 5 oil rigs were taken offline last week in the US, bringing the total count to a fresh 19 month low.   Natural gas rigs did see a small increase of 2 rigs on the week.

The NHC is tracking two storm systems to start the week.  One off the coast of Africa is given 80% odds of being named but looks like it will stay in the open ocean and not be a threat.   The 2nd is in the Gulf of Mexico, but only given 10% odds of developing further.

Click here to download a PDF of today's TACenergy Market Talk.