A potential trade war and Russian meddling, not in an election but to try to influence U.S. energy policies, is all the rage in the financial markets today. U.S. stocks plummeted after President Donald Trump slowed the market with the timing of his announcement that he would impose a 25% tariff on steel imports and 10% on aluminum. This undid the more balanced talk From Fed Chairman Jerome Powell who was bringing calm back to the markets in his testimony in front of Senate Finance committee, where he said that there were no "decisive" signs of wage inflation, reducing the potential risk of a fourth interest rate hike this year.
Yet, that risk of inflation would heat up again if the Trump tariffs start a trade war, as tariffs are inflationary and ultimately a tax on the consumer. Yet, in the big picture of the global economy, the effect might be small, but it is not the reaction that is the worry but instead the reaction from other countries as they start to retaliate.
If the tariffs are put in place, it will raise the cost of production for crude oil. Steel is the most important metal for U.S. Energy production as it is used in every part of the industry from production, refining and processing and distribution of refined products. U.S. oil producers use types of steel that are not always produced in the United States. Types of Carbon Steel that reduce structural stress on pipelines and are more temperature resistant and less corrosive are cheaper to import. The tariffs will raise prices for oil, gas and other plastic products and could slow the countries booming oil production party.
Reuters news reported that officials at the nation’s top energy industry trade groups issued statements urging Trump to reconsider the idea, and a source familiar with ExxonMobil Corp.’s investment plans said the tariff could lead the company to curtail an expansion of one of the country’s biggest refineries. Pipeline trade groups noted that the cost for specialized steel needed to build arteries that carry petroleum would rise. “We are urging the administration to avoid killing U.S. jobs through a steel tariff that impacts pipelines,” said Andy Black, CEO of the Association of Oil Pipe Lines (AOPL). A study by AOPL last year showed that a 25% increase in pipeline costs could increase the budget for a typical project by $76 million. TransCanada’s proposed Keystone XL expansion would cost at least $300 million more.
Reuters reported that the tariffs will not directly hit China that hard. Data shows that Canada supplies 16% of U.S. demand for steel, versus China’s 2%, and is by far the largest steel exporter, followed by Brazil and South Korea. Still, the move was cheered by U.S. Steel companies that say they have been put at a disadvantage as they play by the WTO rules while they say our competitors do not. They also say that the Energy Industry will do OK because they already got big tax advantages from the Trump Administrations.
Bottom line, this potential tariff is another reason to be bullish on oil. This tariff, if put in place, should not derail global growth drastically so even at higher costs we should see demand stay strong. It will also reduce future oil production. That could change if we get into a full-fledged trade war but with so much to lose from our trading partners, I do not think that is going happen, besides president Trump has a week to change his mind. It is the art of the deal.
If you were against the Keystone pipeline or against, drill baby drill, it is possible that you were colluding with the Russians. Maybe a FISA court should authorize a wiretap of you. A new report from the Wall Sreet Journal suggests that the Russian’s were using social media to try to stop the U.S. energy revolution. Why? because U.S. energy cut into their business and they wanted the United States to be more dependent on foreign oil and be strategically weaker because of the dependence. Who in Russia is doing this meddling? I am not sure, but I suspect it could be Boris Badenov as he responds to “Fearless Leader Putin” but may be thwarted by moose and squirrel.
Platts reported that natural gas in storage decreased 78 Bcf to 1.682 Tcf in the week ended Feb. 23, the U.S. Energy Information Administration reported Thursday. The withdrawal was slightly less than an S&P Global Platts' survey of analysts, who called for a 79-Bcf withdrawal. Responses to the survey ranged for a withdrawal of 72-86 Bcf. The pull was much more than the 7-Bcf withdrawal reported during the corresponding week in 2017 but less than the five-year average pull of 118 Bcf, according to EIA data.
Natural gas is acting weak ahead of bad weather in the United States. In Europe, the cold is causing natural gas shortage warnings. Too bad we cannot export more. In Dallas, we could see shortages because of an explosion. USA Today reports that natural gas service to about 2,800 homes in Dallas was suspended Thursday after a home exploded last week, killing a 12-year-old girl. Crews from Atmos Energy surveyed nearby areas after the blast, and Thursday the company decided to replace its gas lines in northwest Dallas, leaving thousands of customers without natural gas for two to three weeks. Dallas-based Atmos, the country’s largest natural gas distributor, will compensate residents who choose to stay in hotels or incur other expenses during the disruption. On Thursday, the company started handing out vouchers to help residents relocate.