Trade war hardball

August 1, 2018 08:00 AM
Daily Energy Market Analysis

Crude oil prices are back under pressure as there are reports that the United States is looking to more than double tariffs on China, as well as a shockingly bearish weekly inventory report from the American Petroleum Institute (API). Out of nowhere, the API reported a 5.590 million barrel build, confounding experts and expectations as well as a big 2.890-million-barrel increase in distillate supply. Gasoline did fall by 791,00 barrels but with trade war fears keeping us on edge, today's Energy Information Administration (EIA) supply report will be more important than today's Fed announcement. 

The stock markets got a boost when word leaked that the U.S. and China might be getting ready to reopen trade talks that have been a worry and a drag for many commodity markets, oil included. Yet, as more details about the talks emerge it seems that the United States is looking to drag China back to the negotiating table with some hardball negotiating tactics. The Wall Street Journal is reporting Trump Administration advisers are pushing the president to apply tariffs as high as 25% on $200 billion of Chinese imports. Bloomberg reports that China warned the U.S. against "blackmailing and pressuring" it over trade as the Trump Administration mulls trying to force officials back to the negotiating table through threats of even higher tariffs.

The tariff threat and the hardball tactics sent foreign and Asian stock markets lower. For oil, a slowdown in Asia, or more tariffs, might hit energy demand. It is clear by U.S. economic data and China data that the United States is winning the trade war battle. The Chinese government is being forced to juice up its economy to fight the U.S. threat. China will have a hard time doing that if the U.S. ramps up tariffs again. China is running out of U.S. goods to tariff and at the end of the day, they are still going to have to buy U.S. grains and meats.

Late July and early August is always a crazy time for oil and products. The days of summer and the summer driving season are behind us and the refinery maintenance season is right around the corner. Yet, at the same time, we still have some demand events, like harvest demand and the Labor Day holiday season, so outside forces can really move us. Last month the call by President Trump for OPEC to raise oil output was met, easing concerns of short-term market tightness. 

Russia and the Organization of the Petroleum Exporting Countries boosted output in July, according to a Reuters production survey on Monday. It showed OPEC members boosted output in July by 70,000 barrels per day (bpd) to 32.64 million bpd, a high for the year, according to Reuters.  Yet, with every barrel OPEC pumps there is less spare capacity, but in shoulder season does it really matter? Get ready for more volatility and use weakness to put on long-term bullish strategies.

We have warned for years that a massive cutback in CapX will take its toll. While we fight seasonal volatility, we still are going to be structurally undersupplied in the coming years. Energy companies have been forced to ramp up spending, so we will see the impact of higher prices in the next few years. Based on our projections, oil should add on average about $10 a barrel per year for the next five years. We base that on a study of the previous bull cycle from 1998-99- until 2008. So far, we are repeating history and we hope to continue to make history in oil. 

 Fed Day today! Not expecting much but get ready for a rate hike in September. Nat gas looking at the temps.

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.