By Barani Krishnan
Investing.com - On the first day of 2020, Phil Flynn, an avowed oil bull, wrote that he was disturbed with the market’s complacency over low oil prices. “This complacency is dangerous because it may catch U.S. businesses by surprise if oil were to experience a sharp upward move,” said Flynn, senior oil analyst at Chicago-based commodities brokerage Price Futures Group, and a contributor to Investing.com. He added: “Potentially this could cause a shock to the U.S. economy, mainly because we are not prepared for it and are not taking protection seriously.”
Flynn lamented that traders seemed particularly immune to the geopolitical risks in oil, noting how quickly crude prices gave back gains accumulated after the mid-September attack on Saudi oil facilities. “There are signs that the risks to supply have not gone away,” he said, citing U.S. airstrikes against Iranian-backed Shiite militia groups in Iraq and Syria, and the resultant attack and protests against the American embassy in Baghdad, all just before the New Year. “One New Year's resolution to make: Do not take the price of oil for granted.”
Many will be forgiven for thinking that Flynn had extraordinary clairvoyant powers. Barely 48 hours after his column, U.S. West Texas Intermediate crude spiked to eight-month highs. Brent, the global oil benchmark, revisited September peaks hit right after the Saudi attacks.
The catalyst for the oil rally was precisely what Flynn had been clamoring about: geopolitics. By now, the facts will be known to all. In the most shocking U.S. offensive against Iran in 40 years, the Trump administration carried out a rocket attack that killed Iran’s top military strategist, Qassem Soleimani, in Baghdad, just three days into the New Year. That the United States and Iran were virtually at war missed no one. What’s not known, including to the oil market, is when the “harsh revenge” promised by Tehran’s Supreme Leader, Ayatollah Ali Khamenei, will come, and the form it will take. President Donald Trump shot back at the Ayatollah in a tweet, saying he had identified 52 Iranian sites to hit in the event of retaliation — “high level”, “important” targets of Iranian culture which “WILL BE HIT VERY FAST AND VERY HARD,” he vowed. The back-and-forth underscores Flynn’s haunting caution: geopolitical risk.
Gold too was running up faster than some investors could pile in on Friday. Gold futures for February delivery on New York’s COMEX hit $1,556.05, a peak since Sept 6. The 1.6% jump on COMEX gold was the most in a day since Aug. 23.
Amid the global risk aversion after Soleimani’s killing, some precious metals analysts were sounding “I-told-you-so”s in their notes on gold, just like Flynn did with oil, on the dangers of ignoring political risk.
“It is risk and uncertainty that we think will determine gold’s ability to post gains in the coming years,” RBC Capital Commodity Strategist Christopher Louney said in a note. “And given the political and geopolitical events on the calendar, we are certainly positive on gold’s price performance."
Oil prices jumped as much as 5% on Friday, reaching nearly $70 per barrel, before coming off their peaks on weekly U.S. inventory data.
While the 11.5-million-barrel drop in U.S. crude stockpiles reported for the week ended Dec. 27 was nearly four times more than forecast, it was perfectly offset by the 3.2-million-barrel build in gasoline stockpiles and 8.8-million-barrel ramp-up in distillates inventories. Thus, the inclination of crude prices to retreat, rather than continue rising.
WTI settled up $1.87, or 3.1%, at $63.05 per barrel. Earlier in the session, the U.S. crude benchmark reached an eight-month high of $64.08.
Brent settled up $2.35, or 3.5%, at $68.60. It hit $69.48 earlier. The last time global crude benchmark came up that high was in the aftermath of the September drones attacks on Saudi Arabia’s Abqaiq oil processing complex, which the United States accused Iran of masterminding.
For the week, WTI rose 2.2% and Brent 0.7%.
But will oil bears be beat into submission by the outsize play on risk? Some aren’t too sure.
“On the surface of it, this is escalation, this is war, that should give oil the huge geopolitical premium that the bulls have been clamoring for years,” John Kilduff, founding partner at New York energy hedge fund Again Capital said.
“Yet, until we see, Iran’s response, it would be wise for the market to play this evenly as we’ve already gone up massively since last month on the flat price of oil. Any further gain would require substantive fundamentals backing as the general expectation for this year is that oil supplies would go up from more U.S. drilling.”
Oil prices closed 2019 with their large gains in three years. Brent rose 24% on the year while the West Texas Intermediate gained 34%, largely on production cuts by OPEC kingpin Saudi Arabia and its top ally Russia.
But the so-called OPEC+ promises to cut output even more this year has been tempered by expectations that U.S. crude production could rise strongly in response to last year’s price gains.
Non-OPEC oil supply, led by the U.S. shale, is forecast to grow by 2.1 million barrels a day in 2020, according to the Paris-based International Energy Agency (IEA).
Global demand for oil, meanwhile, is set to increase by 1.2 million barrels a day next year, the IEA said.
While U.S. crude production as a whole hit a record high of 12.9 million barrels per day in 2019, shale oil output — which accounts for more than half of U.S. total production — has been somewhat restrained this year. U.S. crude producers as a whole cut the number of actively-operating oil rigs in the country to 677 last year from 885 at the end of 2018 — a drop of 208 rigs or 24%.
In the first oil rig data for the New Year, published by industry firm Baker Hughes, the count continued to drop - falling an additional seven rigs to 670.
But 2020 has just started and WTI at north of $60 is very remunerative for U.S. drillers.
Energy Calendar Ahead
Monday, Jan 6
Genscape Cushing crude stockpile estimates (private data)
Tuesday, Jan 7
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Jan 8
EIA weekly report on oil stockpiles
Thursday, Jan 9
Friday, Jan 10
Baker Hughes weekly rig count.
Precious Metals Review
Gold futures for February delivery on New York’s COMEX settled up $24.30, or 1.6%, at $1,552.40 per ounce on Friday.
Spot gold, which tracks live trades in bullion, last traded at $1,552.03, up $23.19, or 1.5%.
For the week, gold futures rose 2.3% and spot gold 2.9%.
Gold typically rallies on political and economic troubles. Iran and the United States have been at loggerheads since Trump canceled in 2018 a global nuclear deal Tehran had signed with Washington and other global powers and reinstituted sanctions against the Islamic Republic.
Pantheon Macroeconomics chief economist Ian Shepherdson said gold could rally further from the U.S. escalation of the conflict with Iran.
"Our base case here is that a full-blown war between the U.S. and Iran is unlikely, though we appreciate the old adage that nothing brings a country together more effectively than an external threat," Shepherdson said.