As oil traders focus on rising rig counts and the potential for OPEC production cuts, a critical battle against ISIS is unfolding in Iraq overnight. Reuters News reports that Iraqi government forces, with air and ground support from the U.S. led coalition, launched an offensive to drive the Islamic State from the northern city of Mosul, the militants' last major stronghold in the country. The United States predicted the Islamic State would suffer "a lasting defeat" as Iraqi forces mounted their biggest operation since the U.S. withdrew its own troops in 2011. For the crude oil market a victory against ISIS would be welcomed as the conflict has added risk premium but we are also seeing risk premium coming from Iran and the tensions in Yemen.

Fox News reported that Iran-backed Houthi rebels in Yemen may have launched missiles at U.S. Navy ships for the third time this week, defense officials said Saturday. Initially, a U.S. defense official said multiple missiles were fired at three ships patrolling international waters at around 3:30 p.m. ET. U.S. Chief of Naval Operations Adm. John Richardson appeared to confirm that assessment, telling reporters the vessels seemed ,"to have come under attack in the Red Sea, again from coastal defense cruise missiles fired from the coast of Yemen." However, a Pentagon official later said only that the vessels, "detected possible inbound missile threats and deployed appropriate defensive measures." He added that all U.S. warships and vessels in the area were safe and that, "post-event assessment is ongoing," but declined to give further details.

Iran continues to flex its muscles against the U.S. and released a tape showing a jailed U.S. business man. The AP reports that, “Hard-liners in Iran posted a video online Monday showing a detained Iranian-American businessman for the first time since his arrest in the country a year ago, a taunting challenge to the United States in the wake of the nuclear deal with Tehran. The minute-long video featuring Siamak Namazi, dubbed over with what sounded like a dramatic film score, highlighted recent tensions between the Islamic Republic and the U.S. It also comes as hard-liners in Iran's security forces continue to target dual nationals and anyone with Western ties after the nuclear deal negotiated by the moderate administration of President Hassan Rouhani. The montage of clips includes an Iranian drone flying over a U.S. aircraft carrier and American sailors on their knees after being briefly detained by Iran in January. It shows Namazi's U.S. passport, his United Arab Emirates ID card and a clip of him in a conference room, his arms raised at his sides."

Of course the real strength in oil comes from the commitment by Saudi Arabia and Russia to drive up prices. Information from the Energy Information Administration suggests that the global market is in balance. That means that even a slight drop in global production would reduce global inventories that are already starting to decline. Even with a rebound in U.S. production, the demand growth factor should allow for prices to move higher even as more supply comes on line.

Oil prices are shaking off the Baker Hughes rig count which reported that oil rigs increased by four, making it 16 straight weeks of no-decline in the active oil rigs. That puts oil rigs at an eight-month high but even with the run of increases, we are still 163 rigs lower than we were a year ago.

We did see a big jump in natural gas rigs that rose by 11, the biggest jump since late January but much needed as U.S. natural gas production has been falling. That put the gas rig count total at 105, a 10-month high, but still 87 rigs below year ago levels. For both oil and gas, our long term bullish outlook is playing out and we believe that we are going to see a supply deficit for oil if we get some cold weather this winter.

Both oil and gas still have significant upside even as the weather in the short term is working against us. Look to buy breaks and continue to add to long term bullish strategies. We have a very long way to go to get rigs back to where we were a year ago when the industry was in turmoil.

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