The Trade War distraction

Daily Energy Market Analysis

Crude oil prices had a tough time staying higher as trade war fears and distraction took the market focus off tightening global oil supply. While many are making ominous predictions of what this trade war may do to economic growth, the reality is that if we are overestimating these concerns the oil market is going to be woefully undersupplied.

The Energy Report has been raising the warnings for some time about the impact of underinvestment in the energy sector and now those chickens are coming home to roost. Even the most diehard oil bears are now starting to realize that the math of meeting supply with demand just does not add up. U.S. energy Secretary Rick Perry is starting to get it as he said yesterday that the OPEC production increase may be a little short of what is needed to prevent shortages. 

Those shortages could become acute in the United States as Syncrude (one of the largest producers of crude oil from Canada's oil sands) says production at its oil sands facility in Alberta--which produces as much as 360K bbl/day--is offline at least through July. That comes as U.S. refiners are buying and running crude at a record rate to keep up with demand.

Some are speculating that Secretary Perry will ask the Russians to pump more oil, as despite the best efforts of U.S. producers, they can’t meet the needs of the refiners and the infrastructure issues and the lack of pipeline capacity is going to force them to slow production until the bottlenecks can be eliminated. 

Energy Secretary Rick Perry also warned that he is trying to "raise some warning flags" about President Donald Trump's trade policies to make sure "we don't shoot a bullet that goes through the intended target and hits whoever is standing behind it." 

Yet, a slowdown in growth may be what it takes to avoid an oil price spike. Genscape, the private Cushing, Okla., monitor, reported that crude supply bounced back from last week’s -2,249,872 draws but only by 198,315 barrels. Those supplies will fall further as the Canadian outage and the slowdown in imports will drain Cushing dry to the bone.

Gas demand is at a record and because refiners have ramped up, they have kept prices reasonable. Gas Buddy reports that for the fourth straight week, average gasoline prices have moved lower, falling 5.3 cents to $2.83 per gallon today according to GasBuddy data compiled from over 10 million price reports covering over 135,000 stations in the last week. Average gas prices decreased in all the nation's 50 states, but that may not last much longer. 

Hedgers must be hedged for more upside risk for gas and product. The global oil market is facing a structural shortfall as Iran and Venezuela fade off into the sunset. The Trillion dollars of CapX cuts that the industry has made will leave a tight market environment for years to come.   

About the Author

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