Crude: Respond in kind

Crude oil prices are on a wild ride. Oil prices rallied as hot rhetoric between the United States and Iran heated up. They sold off on data from Genscape that showed an 83,106 barrel increase in supply in Cushing, Okla., since Tuesday, and after reports of the return of some Libyan oil. Reports show that Waha oil production in Libya rose to 130,000 barrels a day from 100,000 barrels a day last week, as loading resumed at Es Sider port, according to Bloomberg.

Yet, oil prices are rising again as Iran says “will respond in kind” if the U.S. tries to block oil exports. Oil is also getting more support from reports that China plans to increase its infrastructure spending that should help ease concerns about a drop in oil demand due to a slowdown in the Chinese economy.

Trade war or no trade war, China is going to need to keep a strong economy. Oil traders and metals traders sold off last week when China’s GDP slightly missed expectations fearing that a trade war would hurt Chinese oil demand. Still, yesterday, China's State Council announced increased spending and tax breaks as well as measures including special bonds for infrastructure spending. They also pledged to balance easing and tighten policy to keep liquidity sufficient. It also said fiscal policy should be more proactive against a trade war. For oil, this is very bullish and even more bullish if somehow trade war talks between the United States and China begin. Once you start these projects they may overlap with a trade deal increasing Chinese oil demand expectations. 

Iran tensions are still running high, yet we are seeing signs in Libya that things are doing better. Reuters reports that Foreign Ministry Spokesman Bahram Qassemi  was quoted on Tuesday morning by the state news agency IRNA as saying, "If America wants to take a serious step in this direction it will definitely be met with a reaction and equal countermeasures from Iran." 

Oil prices also came back down yesterday on reports that the United States and Saudi Arabia were meeting on ways to increase production after we see the sanctions on Iranian oil exports go into effect. In the meantime, we are caught in this wild trading range as the market generates more power for an end of year rally. With global spare oil production capacity at less than 2% of demand and the prospect for increasing demand out of China, we see the risks weighted to the upside longer term. Tonight, we get the weekly data from the American Petroleum Institute. 

Fuel efficiency wars? The Wall Street Journal is reporting that President Donald Trump’s administration is advancing a plan to freeze fuel-economy standards for new cars and trucks and to escalate its fight against California’s power to set regulatory standards for the entire U.S. auto market, according to people familiar with the matter. The new rules, which could be released as early as this week, would halt plans to keep raising requirements for efficiency. The increases had been set up by a collaboration between California and former President Barack Obama’s regulators to address climate change.

The Trump Administration’s plan would eliminate gradual increases in fuel-efficiency standards for vehicle model years 2022-2025 that would have aimed to bring the figure to roughly 36 miles per gallon in real-world driving by 2025, based on complex government calculations averaged out over all vehicles sold. A "must read" and another reason to buy RBOB.

RBOB prices are still strong as they are being supported by strong demand and expectations that supply will continue to tighten. For Distillate, there are real fears of shortages in some circles. Hedgers should get locked up ahead of winter as the seeds of a major price spike are being sowed.

About the Author

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