Oil Above $100 and the Supply Crunch
Oil trades at 101 to 105 with no relief in sight. The $100 level carries less real weight than people think, but a true supply crunch is now in place. Several forces line up at once: the U.S. has stopped releasing oil from the Strategic Petroleum Reserve (SPR), China is buying more oil, and an outage hit the East-West pipeline in Saudi Arabia. Persian Gulf oil stays badly constrained coming out of the Strait of Hormuz, so every extra outage lands hard. The surprise is that oil is not even higher. Effects will spread across the whole economy for as long as this lasts. This is not a permanent condition, but its length depends mostly on the geopolitical situation.
Oil rose 25% in one month and 62% over one year. Diesel hit new highs at about $6.25.
Diesel and the Russia Factor
Diesel is worse than crude or gasoline for drivers, and worst for truckers. Russia added a problem by banning exports of refined products, partly because Ukrainian drones are hitting Russian refineries. That shortage will work its way through the economy - a bad sign.
President Trump said oil will drop fast and in a big way. Talk sounds good and some trading systems react to it, but nothing said changes the supply and demand picture unless a real agreement holds. Both sides have called the reported deal unconfirmed. Prices only move on real change: Russian refineries coming back online, more diesel reaching the market.
Where to Invest
Be careful investing in energy now. High oil prices help producers, at least for a while, but too much of a good thing is the risk. In 2008-2009 oil hit 147, then fell below $35 a barrel seven to nine months later. That kind of swing takes a strong stomach.
Preferred names right now are refiners: Marathon Petroleum (MPC), HF Sinclair (DINO), and Valero Energy (VLO), all rated buy or four stars. Among upstream names, EOG Resources (EOG) holds a strong buy or five stars, and Diamondback Energy (FANG) holds a four-star opinion.
Venezuela Cannot Fill the Gap
Moving on Venezuela first, then Iran, gives more access to oil in the big picture, helped by new agreements. But Venezuelan oil will not replace lost Middle East supply. Venezuela holds vast oil and reserves, yet bringing that oil to market is hard and takes more than changing the leadership. Energy companies are hard to convince to invest in the needed infrastructure. Much of the oil is very difficult to produce and needs heavy investment. In the long run this helps oil supply, and Venezuela's oil will reach the market in important ways - but not now, not next week, not this year, and probably not next year in any big way. That barrel cannot be counted on to replace what is lost.
Near-Term Path: 110 Over 90
Question: Are we more likely to hit 90 or 110 in the next few months? Answer: 110 is much more likely. No meaningful movement is happening with Iran; the two sides are stuck, and it will take quite a bit of time before anything shifts enough to force real movement. The other variable is how fast Saudi Arabia gets the East-West pipeline back in action, and there is always the threat of terrorism knocking it offline again. With Russia and Ukraine, the outcome stays unknown.
The short-term path of least resistance is higher. Even with the East-West pipeline back online, most of those barrels must turn south through the Bab al-Mandeb strait, which means getting past the Houthis in Yemen - another risk. Many hazards block the normal flow of oil to market. A lot has to go right to reach 90 before 110. Each $10 rise in oil feeds inflation and weighs on GDP.
