Tariffs, OPEC and & getting personal

Daily Energy Market Analysis

Crude oil prices got hit hard as the trade war for oil traders got personal. In a tit for tat, the Chinese government announced tariffs on U.S. oil imports as well as other energy products, in a sector that U.S. President Donald Trump promised to make great again. This along with the fact that most people believe that OPEC and Russia will decide to increase oil output even after reports that Bloomberg says that Iran, Iraq and Venezuela will veto the increase. 

This comes after Russia floated the idea of a 1.5 million barrel a day increase in crude supply that was more than the one million barrel a day increase that was floated around Memorial Day. Yet, the Russia trial balloon of the 1.5-million-barrel increase will only allow for more bargaining room to allow Iran and Venezuela to save face because Saudi Arabia and Russia are already gearing up to put more oil on the market no matter what Iran and Venezuelan want.

The China trade war fears is scaring oil traders into believing that we could see this trade spat lower economic growth and reduce oil demand. Some have raised some concerns about European demand. Yet, a low rate environment and a more dovish President of the European Central Bank Mario Draghi should renew those oil demand spirits.

China is a different story as the trade war threats and refinery maintenance slowed their demand from what was recently all-time highs. Now with China targeting U.S. Energy, its cost to import oil will go higher. U.S. crude exports to China were roughly 380,000 barrels per day in March, which is a large amount but not enough to shatter the global oil supply and demand balance.

In fact, the White House's announcement of $50 billion in planned tariffs against Chinese goods and an equal retaliation by the Chinese will not really slow the global economy by that much, and so the weakness in the market is being overstated. Oil had a similar sell-off on trade war fears only to set the stage for a monster oil rally. Besides, the trade tariffs won’t start until early July--that's plenty of time to cut another deal.

Bloomberg News reports that Iran says Venezuela and Iraq will join in blocking a proposal to increase oil production that’s backed by Saudi Arabia and Russia when OPEC and its allies meet in Vienna this week. “Three OPEC founders are going to stop it,” Iran’s representative to the bloc Hossein Kazempour Ardebili said in comments to Bloomberg on Sunday. “If the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that’s a breach of the cooperation agreement.” 

RBOB futures took a big dip but for how long?  Today’s national gas price average is $2.90, which is down two cents in the last week, unchanged in the last month and 60 cents higher than this time last year according to Triple AAA. Yet despite the fact that we are seeing prices higher, U.S. gasoline demand sill hit a record high last week.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.