Head of the Revolutionary Guard’s aerospace division Gen. Amir Ali Hajizadeh looks at debris from what the division describes as the U.S. drone which was shot down on Thursday, in Tehran, Iran, Friday, June 21, 2019. (Meghdad Madadi/Tasnim News Agency/via AP)
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Here is a rundown of six big factors and events impacting crude prices as the first half of 2019 nears its end.
The “fear premium” redux. – Crude prices rose dramatically on Thursday after it was revealed that Iran’s Revolutionary Guard shot an unmanned U.S. drone out of the sky as it flew near the strategic Strait of Hormuz. Oil markets are always sensitive to any conflict taking place near this key choke point, through which about 20% of global crude supply makes its way to market each day.
President Donald Trump’s cautious approach to responding to Iran’s latest provocation appeared to calm the markets on Friday . After jumping by more than 5% in Thursday’s trading, WTI rose by slightly less than 1% Friday.
Rather than escalating armed conflict with a conventional military response, the Associated Press reported Saturday that President Trump had ordered a cyber attack on computer systems that control Iran’s rocket and missile launchers. That report was based purely on anonymous sources, but if it turns out be accurate, such a non-violent approach could further calm touchy markets on Monday.
The jump in crude price isn’t only about Iran. – While most reports attributed last week’s 10% rise in crude prices to the situation with Iran, the reality is that the price had already run up by 5% by close of trading on Wednesday. In fact, WTI actually dropped to $51.79/bbl on Monday due to ongoing bearish factors, before jumping up to $54.05 in Tuesday’s trading after President Trump tweeted early that morning that he and Chinese President Xi Jinping would be holding side meetings at the upcoming G-20 Summit in Japan. Wednesday’s report from the U.S. Energy Information Administration that crude inventories had dropped the previous week also kept the upwards price momentum going before news of the Iran strike broke.
OPEC+ Finally has a meeting date. – Another ray of bullish sunshine came with Wednesday’s news that the OPEC+ nations, after weeks of uncertainty, finally managed to agree to firm dates to hold their next meeting. That blessed event will take place on July 1 and 2 in Vienna, Austria. The ministers will decide on those days whether to extend their export limitation agreement through the end of 2019, and whether additional reductions in export quotas are needed in order to maintain global supply and demand balance.
The outcomes of that OPEC+ meeting and the meeting between Trump and Xi will greatly influence the trajectory of crude prices for the immediate future.
The fly in the oil price ointment: U.S. production boom continues. – While all of this international drama has been taking place, U.S. oil producers just keep on drilling and producing. After slowly dropping for most of the first half of the year, the DrillingInfo Daily Rig Count appears to have stabilized during the first half of June right at the 1,000 rig level.
Earlier this month, Rystad Energy raised its forecast for U.S. crude output for 2019, saying it would reach 13.4 million barrels of oil per day (bopd) by December. “Our US supply projections have been revised up yet again. US oil production is already higher than many in the market believe,” says Bjørnar Tonhaugen, Rystad’s Head of Oil Market Research.
Meanwhile, OPEC is surrendering market share. – That all sounds great for the U.S. industry, but here’s the thing: In that same report, Rystad also states that OPEC total crude production fell to 29.9 million bopd in May, the lowest level for that group of nations in more than 5 years . It remains to be seen how much more market share those countries will be willing to surrender to the unbridled U.S. industry before their export limitations deal falls apart.
The big question: How will U.S. drillers adjust budgets for the 2nd half of 2019? – Several industry contacts I’ve talked with indicate that we may see another tightening of corporate drilling budgets starting in July. Crude prices experienced high volatility during April and May, the months when most companies went about finalizing their budgets and plans for the 2nd half of the year. That factor, plus continued pressure from shareholders to increase investor returns may lead to another drop in the rig count and number of wells drilled during the last 6 months of 2019.
All of these key factors combine to make the current oil situation a little more interesting than anyone really wants it to be. The decisions reached over the next ten days by international leaders and corporate planners will by and large determine the direction of global oil markets for the rest of the year.
