Trade Concerns Aren't Helping Oil

Energy market is concerned about a trade war slowing recovery
API report shows U.S. demand is on the mend
Offshore oil struggles
Energy Report

Energy Report


The Phil Flynn Energy Report 

A Tiff A Tariff 

Potential U.S. tariffs on the E.U. and the U.K., to the tune of 3.1 billion dollars, along with rising cases of the coronavirus is putting more uncertainty in the economic recovery and the demand growth for oil. Better buy that Louis Vuitton or fancy olives because President Trump, in retaliation from a ruling from the World Trade Organization (WTO) airline protectionism, isn’t sitting well with the administration.

The trade sport isn’t helping oil because part of the story behind the biggest comeback in oil history has been the fast recovery from a total collapse in global oil demand. Fears that a trade war could slow that improvement is making markets nervous even though the Trump administration is leaving some time to negotiate a trade truce.

The oil market was already showing some signs of topping out after surging to more than $41.00 a barrel. The  API report showed a 1.7 million barrel drop in weekly crude supply. Still another 325,000 barrel drop in Cushing, Oklahoma crude supply along with a 3.9 million barrel drop in gasoline supply and a 2.6 million barrel drop in distillate supplies suggest that U.S. demand is on the mend. Some are worried that weak refining margins may halt the crude rise, but if the market stays strong, rising oil product prices should lift all boats. Or oil prices anyway.         

More signs that OPEC cheaters are toeing the line should add some support. Nigeria reportedly is raising its official selling prices for July. That means that they’re getting in front. This comes with more signs that the physical market in Europe in tight with buyers of oil left scrambling.

We’re also going to see the U.S. oil production struggle despite talk of some shale wells coming back online. Offshore oil production is in big trouble as well. Reuters reports that , "The companies that operate offshore drilling rigs for major oil producers face a second wave of bankruptcies in four years amid a historic drop in energy collapse of the offshore industry will have a broad impact. Drillers and their suppliers have driven innovation that has helped shale and offshore wind companies by pioneering remote monitoring and control, and last year directly generated about 25% of global oil production.”

Reuters says that, "The offshore services business is the worst performing of the oilfield services sector, with shares of the 10 largest publicly traded down 77% since the start of the year. Four of the 7 largest offshore drillers — Diamond Offshore Drilling Inc., Noble Corp, Seadrill Ltd and Valaris Plc— have sought protection from creditors or begun debt restructuring talks that could lead to bankruptcy. Two others are reaching out to their creditors. Pacific Drilling last month said it might need to modify terms of its debt, and was seeking alternative funding in the event creditors would not accept new terms. Shelf Drilling, the 9th-largest by revenue, is seeking talks with creditors over loan covenants that take effect next year, executives said.”

Zero Hedge reports that, "The World Trade Organization (WTO) outlines, in a new report, that "rapid government responses helped temper the contraction" in the world trade and likely thwarted the worst-case scenario projected in April. WTO is referring to massive fiscal stimulus deployed by governments, and the balance sheet of the G-6 central banks that has exploded, with the Fed's total asset expected to double in 2020 amid an avalanche of money printing that has helped arrest the collapse in world trade." Do you think? 

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About the Author

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