Crude: Tariff proof oil

August 24, 2018 11:15 AM

China is buying our oil and that could be Iran’s worst nightmare. It seems that the Chinese trade talks went nowhere, but despite that fact, China’s demand for U.S. crude oil might rise anyway. According to Reuters “China’s Unipec will resume purchases of U.S. crude oil in October after a two-month halt due to the trade dispute between the world’s two largest economies.”

This news, along with reports that talks between French oil refiner Total and workers on three of its North Sea oil and gas platforms broke down, on meaning that a series of planned strikes will go ahead is raising concerns about tightening global supply and sending oil soaring. This comes on a day when oil traders await the rig count , news on Federal Reserve Chairman Jerome Powell’s debut address central bankers at Jackson Hole Wyoming as well as the weekend. The pullback in the dollar is also helping oil and if Powell sounds the least bit dovish, we could see a big move up in oil to end the week.

Reuters is reporting that oil production will stop in the North Seas when the strikes happen. The three fields combined oil production contributes about 45,000 to 50,000 barrels per day (bpd) to the North Sea’s Forties and Brent crude streams.  

The China-U.S. trade talks ended without of a lot news to focus on. Bloomberg reported that in a statement, the White House said the countries “exchanged views on how to achieve fairness, balance, and reciprocity in the economic relationship, including by addressing structural issues in China” identified by the U.S. in an investigation into Chinese IP practices. The two nations had "constructive, candid" communication, and will keep in touch about the next steps, the China commerce ministry said in a statement released Friday.

Yet, it is clear that despite reports of China putting tariffs on the U.S., the big players are going to buy U.S. oil. Many thought that China would replace U.S. oil with Iranian oil, but now it appears that Iran’s best customer is going to use the U.S. oil as leverage to get Iranian oil at a discount. It is also a sign that that Chinese oil demand is not slowing as much as some may have thought. Reuters writes that the decision to start buying crude oil again from the United States comes after Beijing, earlier in August, excluded it from its import tariff list. A source with knowledge of the matter said Unipec will “buy some U.S. crude, loading in October, following the change in Beijing’s policy.” This news is supporting oil.

With oil strikes and U.S. refining demand nearing record oil is breaking out. With the U.S. maintenance season showing strong signs of not slowing down, it is clear that the normal drop in crude demand might not be as large as in years past. While oil products are seeing a counter-seasonal increase, it is clear by the crack spreads that the market is signaling that demand for oil products will continue to be strong.

Canada has been taking advantage of record U.S. refining demand. The UPI reports a Canadian energy regulator reported the average daily amount of crude oil exported by rail has nearly doubled from the previous year. Canada designates nearly all its oil exports to the United States. For the last week in June, U.S. federal data show Canada exports to the United States were up 11.8 percent from the same time last year. The four-week moving average for that week was 12.2% higher year-over-year.

Market Watch reported that the U.S. Energy Information Administration reported Thursday that domestic supplies of natural gas rose by 48 billion cubic feet for the week ending August 17. Market consensus had called for a rise in the 50 billion to 55 billion cubic foot range, which would have been roughly in line with the five-year average for this time of year, according to Schneider Electric. Total stocks now stand at 2.435 trillion cubic feet, down 684 billion cubic feet from a year ago, and 599 billion below the five-year average, the government said. September natural gas NGU18, +0.47% was up half a cent, or 0.2%, at $2.961 per million British thermal units, up from $2.943 before the supply data.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.