Crude: Trump ups the ante

Trade war fears are escalating after President Donald Trump hit back against the Chinese by asking his administration to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10%. This came after markets started to shake off concerns about the United States imposing a 25% tariff on up to $50 billion of Chinese products. China then retaliated and now President Trump is raising the stakes with a new tariff threat and the Chinese are running out of U.S. imports to put a tariff on. 

Crude oil, of course, is in the Chinese crosshairs and the market’s concern is simply that this trade war will hurt growth and slow energy demand. While that remains a possibility, we expect global supply to get a lot tighter in the coming weeks. The API will release a report that is widely expected to show another drop in U.S. crude supply as well as record-breaking demand.

U.S. supply should fall below the average range this week as record-breaking gasoline demand keeps the market buoyant. Even as the Energy Information Administration predicted that crude-oil production from seven major U.S. shale plays is expected to see a climb of 141,000 barrels a day in July to 7.339 million barrels a day, concerns that the lack of pipeline capacity in the Permian basin is going to force producers to put on the brakes. It’s great to produce oil but it does not help if there is no place for it to go.

Plus, because of the bottlenecks you are seeing, Permian Basin crude sells well below the WTI market prices. OIL Price reports that the price discount for oil in Midland will widen from around $9 per barrel this month, to between $14.50 and $17 per barrel for much of 2019. Goldman Sachs predicts that when the current slate of pipeline projects come online, the discount will vanish by 2020, but until then, the problem could grow progressively worse.

The break in price is also going to make this week’s OPEC/NON-OPEC meeting more exciting. Despite the protestations from Iran, Iraq and Venezuela, the group will raise output because Russia and Saudi Arabia believe it is time. Yet, is anyone concerned that with an increase, global spare capacity may fall close to 1.5% or lower? Maybe not right now but after a disruption, they sure will.

My buddies at Gas Buddy report that for the third straight week, average gasoline prices have moved lower, falling 2.8 cents to $2.888 per gallon yesterday, according to GasBuddy’s survey of 135,000 gas stations, incorporating over one million price reports daily. 47 of the nation's 50 states saw average gas prices decline. The unlucky three that saw prices rise were Michigan, Indiana and Vermont. With the U.S. unemployment rate at historic lows and wages rising, consumer confidence high record demand should continue.

About the Author