Crude: Trade tiffs and crazy cuts

March 23, 2018 07:59 AM

Crude oil sold off on tariff fears but rallied back as Saudi Arabia is signaling that they are just crazy about production cuts and want an extension. It's tariff fears versus rising demand and falling supply for oil and it seems that supply and demand have the edge right now.

Oil prices yesterday followed stocks lower, grudgingly after President Donald Trump signed a presidential memorandum that could impose tariffs on up to $60 billion of imports from China. China responded, warning that if the U.S. follows through with that threat they could respond by putting tariffs on as many as 128 U.S. products. It was reported that the tariffs could hit things like pork, nuts, steel pipes and even, God forbid, wine! Now it is getting serious. Or is it?

The past steel market tariff sell-off was way overdone because when it comes to the art of the deal, Trump’s bark is worse than his bite. The steel tariffs that tanked the market earlier have more exemptions and are squishier than a sponge, and they have been suspended until May 1 for most countries. Argentina, Australia, Brazil, Canada, Mexico, the European Union countries and South Korea were put on hold because the countries' important security relationships with the United States warranted further discussion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

The order that was signed yesterday included a 30-day business comment period that will allow for negotiations with the Chinese, that have clearly put higher tariffs on U.S. goods and forced U.S. companies to share trade secrets and have outright stolen intellectual property. If President Trump’s pressure allows for a better deal with China, it will be viewed as a great success. If it results in a trade war than it will be a major failure. Still, as it stands, these tariffs that are in play are very small when viewed as part of the overall economy.

Which means that despite this mess, daily oil demand will exceed daily production. Despite rising U.S. production, global demand and OPEC cuts have put the globe into a supply deficit. Now it appears that OPEC is going to extend those cuts and the market is taking them seriously, as they should. OPEC compliance to the current cuts exceeded 138% which was their best compliance to a deal, ever. 

Natural gas can’t catch a bid as winter comes to an end while production shines. The EIA reported that dry gas production hit a record 79.1bcf. That is overcoming winter draws in storage. The EIA reported that working gas in storage was 1.446 Bcf as of Friday, March 16, 2018, according to EIA estimates. This represents a net decrease of 86 Bcf from the previous week. Stocks were 667 Bcf less than last year at this time and 329 Bcf below the five-year average of 1,775 Bcf. At 1,446 Bcf, total working gas is within the five-year historical range.        

This also means that we are going to see rising prices in the next year. Make sure you get hedged against the risk this summer. The biggest threat to the upside is an all-out trade war, which I believe is not going to happen.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.