Everyone has a plan until they get punched in the face.
~ Mike Tyson
Please see the previous game plan articles:
August 25, Sept 1, Sept 8, Sept 23, Sept 30, Oct 12, Oct 19, Oct 27
Ouch, that oil sell-off was more than a bruise. Yes, I felt the pain, and while I tried to game out every possible scenario after the US Midterm Elections, I didn’t see this oil sell-off coming.
In my last game plan article, these were the paths I laid out:
Path 1: US attacks Iran’s surveillance capabilities, and Iran DOES NOT retaliate against stationary tankers or Fujairah.
Path 2: US attacks Iran’s surveillance capabilities, and Iran retaliates against stationary tankers and Fujairah.
Path 3: US does not attack. Iran continues to escalate against tankers.
Path 4: US does not attack. More peace deal headlines follow after the midterms. Iran does not increase escalation.
Path 5: US and Israel attack Iranian power plants and civilian infrastructure. Iran retaliates against Gulf infrastructure.
With the benefit of hindsight, we currently have a little bit of path 3 and 4. The US has been doing “love taps” on Iran’s surveillance capabilities for the past week (radars and such), and Iran has been escalating tensions in the Oman Lane.
You might not have known this from the oil price action, but just over the weekend, we saw 8 tankers attacked, and at least 3 of them were on fire. Videos of the tanker attacks have been circulating, and oil flow trackers are now showing visible signs of a slowdown in the Oman Lane.
So why are oil prices down?
For starters, after the US Midterms, the broader expectation was renewed strikes on Iran. The sell-off, coupled with renewed peace-deal headlines, has rinsed the market of long positioning. We won’t get trader positioning until this Friday, but my guess is that longs have liquidated in size.
For the physical oil market, my game plan article at the end of October noted that traders don’t see any panic. In fact, my discussions with traders point to the opposite, with the Saudis having unsold cargoes. Aramco’s official selling price was reduced yet again as the Saudis attempt to entice traders to take the barrels. Energy Aspects noted in its report today that Saudi boosted oil production to 10.5 million b/d in October, effectively eliminating any production shut-in, but barrels supplied to the market was closer to 9 million b/d. Now, whether this is the Saudis frantically trying to sell barrels ahead of any escalation is anyone’s guess, but the Saudis appear eager sellers in the market, and with recent tanker rate drops, this abundance has been an overhang... for now.
What about storage?