Crude: Trade game on!

Daily Energy Market Analysis

The deadline has passed. President Donald Trump fired the trade war shot heard around the world as he suggests the United States is mad as heck and isn’t going to take the record $375 billion trade deficit with China in 2017 anymore. Around $34 billion in tariffs went into effect at midnight with China calling it the start of the largest trade war in history and retaliating by adding $34 billion dollars of its own tariffs. Trump says trade wars are easy to win and that we hold all the cards. Many business and supply chain number crunchers are hoping he is right.

As for crude oil, there is talk that China will put a 25% tariff on U.S. oil, which according to Reuters amounted to roughly 400,000 barrels of oil a day or about a billion dollars of oil a month. Chinese refiners are already canceling shipments of U.S. crude even though the U.S. oil will be bought as global supply is still very tight. The American Petroleum Institute (API) has rallied hard against tariffs. API CEO Jack Gerard told the Fox Business Network last month that the tariffs would hurt the U.S. energy market and that the tariffs would be problematic for domestic oil and gas producers.

"We understand what the president is trying to do in terms of the broader discussions. But fundamentally, from an energy perspective, under NAFTA [the North American Free Trade Agreement] we've had open border trade policy for many years. We're significantly net exporters to Mexico. Many Americans don't know that the United States imports a fair amount of Mexican crude to refineries along the Gulf Coast. Refined products and gasoline are then exported back to Mexico. We're very concerned that what we've now entered into could disrupt the equilibrium, the balance we've achieved in energy trade. We would hope they would think clearly and specifically about energy and what this means for energy as the president is trying to accomplish his broader purposes."

Oil is weaker, but it isn’t only the trade war that has got it down, there is also concerns about a surprise increase in U.S. supply as reported by the Energy Information Administration (EIA) as well as reports that the much-anticipated Saudi Aramco IPO may be kaput.

Despite expectations of a major crude draw, the EIA reports that U.S. crude supply increased by 1.245 million barrels. While supply in Cushing, Okla., did fall as expected by 2.113 million barrels because of the Syncrude Canadian oil sands outage. Supply down in the Gulf Coast increased by 2.953 million barrels with bad weather in the Houston Shipping Channel. The increase in crude supply is a one-off and we should see a big drop in supply next week. 

Rumors that the Syncrude outage may be fixed sooner than expected was discounted as the company had no updated timeline. In fact, there were later reports that despite the early stages of a restart process, it may be August before the oil starts to flow again.

Refinery demand dipped from record highs as refiners ran a still impressive 17.65 million barrels of oil a day at 97.1% of capacity. Gas demand did not disappoint rising by 12,000 barrels to 9.860 million barrels a day. That caused U.S. gas stocks to fall by 1.505 million barrels. U.S. consumers filled up big time ahead of the Fourth of July holiday and took to the open road. Distillates rose 134,000 barrels. Just as crude production was pretty much steady is a sign that we have seen a short-term peak in U.S. output as bottlenecks are boxing in U.S producers.

Oil also sold off after The Wall Street Journal reported that Saudi Aramco IPO, the biggest IPO ever, may not happen. The Journal quoted a senior executive at Aramco as saying that “Everyone is almost certain it is not going to happen.” That report adding to pressure on the oil trade as many thought that the only reason why Saudi Arabia led the effort to reduce global oil supply was so they could secure a high price for that IPO. Now it’s every producer for himself.

The torms are coming. Reuters reported that tropical depression has strengthened into Tropical Storm Beryl east-southeast of the Lesser Antilles in the Caribbean Sea, the U.S. National Hurricane Center (NHC) said in its latest advisory on Thursday. Beryl is located about 1,330 miles (2,140 km) east-southeast of the Lesser Antilles and is packing maximum sustained winds of 40 miles per hour (65 km/h), NHC said.

About the Author

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