Crazy for crude

April 3, 2018 08:08 AM
Daily Energy Market Analysis

The crude oil sell-off was just downright crazy. Oil got caught up in trade war fears, tech wreck fears, OPEC/Non-OPEC compliance fears, and a build in Cushing, Okla., oil stocks, as reported by Genscape. Stocks had the worst start to April since 1929, but really the magnitude of this sell off was a big April’s Fools Day joke that just one day late.

The trade war fears are really overblown as there were no tariffs put on oil and tech wreck fears really has little to do with oil demand, and just because Russia had a seasonally expected increase in oil production does not mean the OPEC /Non-OPEC deal is falling apart. Skeptics of this unholy OPEC/NON-OPEC alliance have been waiting for it to fall apart for over a year-and-a-half before it even started. Yet, the crowd has misread OPEC and Russia’s intentions, and to suggest that the OPEC/NON-OPEC alliance is falling apart is just ridiculous.

Oil freaked out when it was reported that Russia’s oil output edged up in March to an 11-month high of 10.97 million barrels per day (bpd), slightly above a limit agreed under a global supply pact, energy ministry data showed on Monday according to Reuters. Yet, Russia had to raise production to meet weather-related demand. Reuters reported that “Russia reached the production cuts compliance (with the OPEC deal) of 93.4%. The fluctuations of the liquid hydrocarbons in March were due to a high demand for gas and seasonality on the domestic market,” Energy Minister Alexander Novak said in a statement. “Russia is fully committed to reaching the balance on the oil market,” he added.

Besides, OPEC and its allies are at a compliance rate of 138% of pledged output reductions last month. Anyone who suggests that a one month increase by Russia is a deal breaker has got to be telling you a bad April Fool’s joke. The reality should soon set in and we should be primed up for another turnaround Tuesday.

Genscape, the private forecaster, did add to the bearish mood by reporting a sizable 2,646,345-million-barrel increase in Cushing. Yet, even with the increase, storage still has supply well below year-ago levels. Oil demand is on the rise with expansion in the U.S. and Chinese manufacturing sectors. 

Trade war mania did increase after China increased tariffs by up to 25% on 128 U.S. products from frozen pork and wine to certain fruits and nuts, but I stress not on oil. The response is very muted by the Chinese and it looks like this was a saving face gesture before the Chinese start to negotiate with the Trump Administration. 

Not funny, Elon. Elon Musk’s joke about Tesla added to the tech wrecks woes. Musk tweeted that “Despite intense efforts to raise money, including a last-ditch mass sale of Easter Eggs, we are sad to report that Tesla has gone completely and totally bankrupt.” Of course, if Tesla goes bankrupt that may be bullish for oil. If the company that advanced the ball on electric cars is having trouble, perhaps the talk of the death of the internal combustion engine is greatly exaggerated. The Peak Demand theorists will have to push back their so-called peak demand dates.

Marketwatch is reporting that President Donald Trump reportedly is “obsessed” with Inc. Chief Executive Jeff Bezos and is seeking ways to damage the company, according to a report late Monday by Vanity Fair. Amazon has been the target of harsh tweets by Trump in recent days, according to Marketwatch, and its stock slid more than 5% Monday. The president has especially railed against the tech giant for skirting state sales taxes and its deal with the U.S. Post Office, which Trump claims loses money for the USPS, although independent analysts say the Post Office makes a profit on the deal. Amazon also pays sales taxes in 45 states. 

Yet, this should not affect oil. Amazon is not going away anytime soon and the so-called potential for a trade war is being overblown. It is obvious that the theft of intellectual property by China as well as their tariffs on U.S. cars and wheat —to name a few — are out of line. China knows they have been getting away with it and now they know it will be time to negotiate. 

Then oil traders can get back to supply and demand. Despite record U.S. oil production, U.S. supplies are below the five-year average. Gasoline demand in the U.S. is at records highs. Global oil demand is near record highs. The global oil production decline rate is accelerating. Global oil inventories are tightening. 

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.