Crude: Imagine there are no tariffs

Daily Energy Market Analysis

Imagine there are no tariffs. It’s easy if you try. No price floor below us, above us only sky. Imagine all the people trading free in peace. You may say I’m a dreamer but I’m not the only one. I hope one day the WTO will join us and the world will trade as one.

President Donald Trump said that he and President Jean-Claude Juncker of the European Commission agreed to “to work together toward zero tariffs, zero non-tariff barrier  and zero subsidies on non-auto industrial goods." While some thought that the actual specifics on how they were going to achieve that goal were thin, some markets are moving on the prospects of what has been achieved in this meeting and what may be achieved in the future. Promises that that that the EU will buy U.S. soybeans and will become a ‘”massive” buyer of U.S. Liquefied Natural Gas LNG.  

Trade war truce is giving grains and copper a boost and perhaps we are taking steps toward one of the most significant trade discussions in our lifetime. Trump says that it is a big day for fair trade. While in the short term, some may be disappointed with the small steps that are being taken, but tariff freezes and a free trading zone is an aspiration that indeed could change the world for the better. Also, any progress on talks between the United States and The European Union on trade will ratchet up the pressure on China to come to the table in a new world free trade order.

For crude oil, free trade is very bullish assuming the market believes that China will get on board in this new world free trade order. Yet, oil has other reasons to be bullish: Tightening supply and rising geopolitical risk. Not only did we get bullish data from the Energy Information Administration we also had reports Saudi Arabia was “temporarily halting” oil shipments through the Red Sea shipping lane of Bab al-Mandeb after an attack by Yemen’s Iran-aligned Houthi movement, according to Reuters. Saudi Arabia has a major export terminal in Ras Tanura -- also home to the country’s largest refinery -- on its eastern coast. The kingdom exports most of its crude on tankers passing through the Strait of Hormuz. 

Still, according to the EIA, closing the Bab el-Mandeb Strait could keep tankers in the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa. An estimated 4.8 million barrels per day of crude oil and refined petroleum products flowed through this waterway in 2016 toward Europe, the United States and Asia, an increase from 3.3 million b/d in 2011. 

On top of that, U.S. supplies are tightening dramatically. The EIA reported a 6.1 million barrel drop putting U.S. crude supply at the lowest level since 2014. Crude oil supplies are just 67 million bbl above the 10-year average, This comes as U.S. refinery runs hit a seasonal record 17.3 million barrels of oil.

Distillate stocks are at the lowest level for more than a decade. Total commercial stocks fell 9.7MB this week. Total demand on the U.S. system increased 1.024M bpd to set a new all-time high of 27.068M bpd shattering the previous high by nearly 300k bpd (26.8M bpd on 15 Dec 2017). 

Cushing, Okla., stocks fell 1.1MB. Nymex delivery hub stocks are only 23.7MB. Cushing stocks are just 5MB above their five-year lows of 17.9MB. Lower 48 crude production increased 100k bpd this week as Alaskan production fell 82k bpd on seasonal maintenance.

Ready to use "gasoline" stocks fell 2.7MB total overall stocks by 2.3. All and all we are in a tight market with upside price risks . Get hedged! Fill up you gas tank before prices rise again.

About the Author

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