Crude is not pleased

May 23, 2018 08:25 AM
Daily Energy Market Analysis

Crude oil prices are under pressure after Present Donald Trump took away some of the growing optimism of a United States/Chinese trade deal, along with some non-sourced OPEC talk about raising oil production at their next June meeting and weaker than expected manufacturing data in Europe.

Just when you thought the trade war was on hold, President Trump said he was not pleased with recent trade talks between the United States and China, but said it was a start. Critics of the President have been bashing him first for starting a trade war and now for not winning it. Yet, there have been concessions by the Chinese and the trade pressure that was ramped up by Trump will be felt by the Chinese as other trade partners with China will become bolder. President Trump is just keeping up the pressure and it is not a sign that the trade war will flare up.

Boy, I have missed them. Who am I talking about? Those unnamed OPEC sources. Reuters reported that an unnamed OPEC source suggested that OPEC may raise production at their June meeting to make up for the loss of Venezuelan oil supply and the potential loss of Iranian supply due to sanctions. Argus Media reports that Saudi Arabia, Russia and the president of OPEC are likely this week to discuss a controlled relaxation of over-compliance with the OPEC and non-OPEC production-cut target. Saudi oil minister Khalid al-Falih, his Russian counterpart Alexander Novak, and UAE energy minister Suhail al-Mazrouei, the Opec president, will meet in St. Petersburg. 

Yet, if OPEC decides to raise output it may unmask another fear and that is the growing lack of spare oil production activity across the globe. The over-reliance on shale output leaves the global economy more susceptible to oil price spikes as they will be strained to get shale oil into the global market. U.S. Shale production will grow less than expected. Well depletions and prime drilling areas will be taken. Rising costs, labor and the inability of many shale producers to make money will leave the global oil market undersupplied. 

While oil demand in Asia is high, worries about Europe are creeping in. The Wall Street Journal reports that ”Business activity in the Eurozone slowed for the fourth straight month in May and more sharply than expected, a survey of manufacturers and service providers showed, a sign that economic growth has yet to rebound from a surprisingly weak showing in the first quarter”. The Journal says that the Eurozone economy entered 2018 on a high, having recorded its fastest expansion in a decade during 2017 as it outpaced the U.S. for the second straight year. But official figures for the first three months of the year recorded a sharp slowdown, which economists have largely attributed to a combination of unusually cold weather, strikes in the Eurozone’s two largest members and a severe flu outbreak in Germany.

Most economists had expected to see stronger growth during the rest of the year, but there are yet few signs of a revival. Data firm IHS Markit Wednesday said its composite Purchasing Managers Index for the currency area-based on survey responses from 5,000 businesses-fell to 54.1 in May from 55.1 in April. A reading above 50.0 signals an expansion in activity. That was the lowest reading for 18 months, and a weaker outcome than the decline to 54.8 forecast by economists who were surveyed by The Wall Street Journal last week. The number is adding to stock market weakness early and weighing on oil a bit.

Still, U.S. oil data is still decidedly bullish. The American Petroleum Institute (API) reported that crude supply fell by 1.3 million barrels, led by an 822,000-barrel drop in Cushing Okla. The API reported that gasoline rose by 980,00 barrels as some may look at that is a concern about demand. Distillates fell by 1.3 million barrels keeping those supplies very dangerously tight. Not good for diesel prices or jet fuel prices. The Energy Information Administration report may show even more bullish numbers.

Lumber Liquidators. After Lumbers historic price spike traders have been running for the exits. Still a tight market, but we have found a short-term top. Natural gas is being driven higher by warm weather forecasts as well as bullish giddiness. When it ends for Nat gas it will not end well, as producers come out of maintenance.

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.