Crude oil prices got slammed on fears surrounding the Turkish economy, ongoing concerns about China, and a big build in crude supply, but really a lot of what is driving the bus is the strong dollar. Not just the traditional inverse relationship that oil has with the dollar, but how this massive up move is impacting oil supply and demand.
A bearish American Petroleum Institute (API) report, as well as the continuing drama surrounding Turkey is raising fears of a slowdown in oil demand based upon fears of raising contagion coming out of Turkey. The oil market that tried to mount a major comeback yesterday was thwarted by a risk aversion in the dollar that sunk oil, as well as industrial and precious metals.
While the market starts to come to grips with the new sanctions on Iran and a larger than expected crude draw, as reported by the American Petroleum Institute (API), what should concern them is that U.S. crude oil production is not quite what it was fracked up to be.
Big oil is back, and we have earnings today but so is big LNG. OK, maybe the market for Liquefied Natural gas isn’t big yet but it is going to be. President Donald Trump boasted that “Europe will be a massive buyer of U.S. LNG as they will be able to diversify their energy supply.” Some dismissed the comments as not likely, but those who did are thinking small or not looking at the big picture. In coming generations, the United States will be the LNG supplier to the world.
The Trump Administration has a knack for cooling down crude oil prices every time they look to be getting out of control. Trade War talk, potential wavers on an Iranian oil embargo, and telling Germany that they are captive to Russia because of the reliance on them for energy supply, not to mention the resumption of some Libyan oil exports cooled off prices as they were boiling over due to rapidly falling U.S. supply.
While the markets await the outcome from the Fed meeting and oil traders fret about whether OPEC and non-OPEC might raise production, as well as the weekly supply report, the biggest threat to the price of crude oil and the global economy may be the lack of spare oil production capacity. Reuters reports that global spare oil production capacity could fall from more than 3% of global demand now to about 2%, its lowest since at least 1984, if OPEC, Russia and other producers decide to increase output when they meet on June 22-23. Some analysts say spare capacity could even fall below 2%, after years of low oil prices drove down investments in new production across the industry to a historic low.
The S&P gave us exactly what we talked about yesterday, a constructive session with buying interest. The Russell 2000 has quietly been a leader for much of the post-correction trade and yesterday it set a new all-time high.