Houston, We Have a Problem

July 22, 2020 12:25 PM
The API statistical bulletin reported a massive 7.54 million barrel crude build
U.S. State Department orders Chinese consulate in Houston to close
The natural gas rally is fizzling
Energy Report



The Phil Flynn Energy Report 

Houston Problems 

Crude oil has a Houston problem that is causing it to pull back from pre-oil price war highs. Not only did the API statistical bulletin report a massive 7.54 million barrel crude build, probably from near Houston and the Gulf Coast, but the U.S. State Department ordered the closure of China's consulate in Houston, "in order to protect American intellectual property" and private information of U.S. citizens. This is raising fears that deteriorating relations between the U.S. and China could restart the U.S.-China trade war and take a toll on demand that is still trying to recover from the Covid-19 hit. Demand expectations had been rising on vaccine hopes but are now pausing with President Trump signaling that for Covid-19, it is probably going to get worse before it gets better.

Yet in the API, there were some signs of oil demand hope. The API reported that gasoline supply fell by 2.019 million barrels, signaling that perhaps some of the talks of a gasoline demand drop might be overstated. The API also said that distillate supply fell by 1.36 million barrels. The build of 7.54 million barrels almost erased last week's massive crude draw. The tiebreaker will be the EIA and next week's data, where we should start to see crude oil start to draw again. Another supportive footnote was the fact that the reported increase was only 716,000 barrels and smaller than the private forecasters were saying.

International demand expectations are getting a boost on reports that Japan is going to resume business travel with China, South Korea, and others. Yet that may be offset as tensions between the U.S. and China surrounding the closing of its consulate, may make demand projections more difficult. 

Oil wasn’t the only thing burning in Houston. The Wall Street Journal reported, "In Houston, firefighters and police officers responded Tuesday evening to calls related to the Chinese consulate, where smoke was seen rising from an outdoor courtyard area, local police said. Footage aired by local television stations purportedly showed people burning documents on the consulate's premises.” China isn’t very happy. The Wall Street Journal reported that Washington's demand marked, "a political provocation unilaterally launched by the U.S." Chinese Foreign Ministry spokesman Wang Wenbin said Wednesday at a routine briefing in Beijing. "China urges the U.S. to immediately rescind its erroneous decision. Otherwise, China will undertake legitimate and necessary responses. ” If those responses are about trade, then get ready for another wild ride. We have had a few lately to say the least.

Yet can another shot of U.S. stimulus calm the waters? Fox News reported that Senate Majority Leader Mitch McConnell on Tuesday made clear he supports another round of stimulus checks to Americans. The economy needs "another shot of adrenaline" amid the coronavirus pandemic, he said. McConnell, has been in negotiations with top congressional Democrats and the White House on what the next coronavirus bill would look like, as the Trump administration is pushing a package with a price tag of $1 trillion. McConnell said he supports "another round of direct payments" to Americans – something President Trump and top members of his administration have said they, too, support."

The natural gas rally is fizzling. Andrew Weissman of EBW analytics reports that the front-month Henry Hub Natural Gas contract plummeted 10.7% over the past couple of weeks, even while extreme heat was blanketing the Lower 48. Despite power burns flirting with record highs, a combination of weak liquid natural gas (LNG) demand, production gains, and ample salt storage supplies have been more than sufficient to absorb increased demand for natural gas while sending prices lower. Weissman says that the inability to rally reduces upside risks for natural gas futures through mid-August—amid paltry LNG flows and falling power burn—and opens the window for shorts to meaningfully increase positions and attempt to break through support. By the end of the 30-45 day window, the fundamental picture may begin to brighten, but faltering physical flows are likely to keep NYMEX gas futures weak.

Don’t miss out on my wildly popular trade levels on all major markets as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.

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.