Talk, why don’t we?

August 17, 2018 06:12 PM
Daily Energy Market Analysis

Commodities tried to turn the corner on reports of low-level talks about a framework to end the trade war and this made everyone realize that perhaps some of the fears of the backlash from a trade war were overblown. China is feeling the pain of the trade war while the United States looks to be gaining. If recent trade trends continue, it is possible that the United States may find it harder and harder to lift tariffs, which seem on par to be giving the country a decisive advantage of opts trade partners. This comes against a backdrop of ongoing U.S.-Turkey tension and a failing Venezuela, whose President’s economic plan may make things worse and perhaps collapse the Venezuelan oil market.

Reuters repoted: China and the United States will hold lower-level trade talks this month, the two governments said on Thursday, offering hope that they might resolve an escalating tariff war that threatens to engulf all trade between the world’s two largest economies. The news did cause a pullback in the dollar and copper, which is the most oversold it has been in years and it attempted a bottom out of bear market territory. Crude oil also tried to rally but seasonal concerns and a bearish Energy Information Administration (EIA) report held back the market.

Bloomberg is reporting that many Venezuelan shops closed as a precaution as confusion reigned Saturday following measures announced by President Nicolas Maduro aimed at fighting an historic economic crisis in the oil-exporting nation. The government will enact a massive currency devaluation, an increase in taxes, and will raise gasoline prices. A new version of the bolivar will trade roughly in line with where the black market was, and the government will raise the minimum wage more than 3,000 percent -- a level that still only equates to $30 a month. The new currency is based on the price of oil, which historically is at a boom and bust commodity anyway. This will not end well. Venezuela will collapse and it is going to be interesting to see how the world picks up the pieces. For oil traders, it is only a matter of time until Venezuela’s oil production falls to zero.

The Baker Hughes rig count went flat last week. The oil trade is still trying to come to grips with last week’s massive increase in crude supply and imports. The increase in imports of more than 1 million barrels a day will be hard to be maintained and trade should lead to a 3-million-barrel drawdown in crude supply. Despite the big crude increase, you must keep in mind that U.S. refining runs shattered records and so it is not like that oil is going to stay in storage long. In fact, refining margins are so good, that many refiners may want to put off maintenance, pushing back of even lessening the impact of the shoulder season. Look at this market weakness to put on bullish strategies as oil prices are more than likely near the low point for the rest of the year.

Still, seasonal weakness for RBOB could allow the supplies to increase by 2 million barrels and record production of diesel should allow those supplies to increase by 1 million barrels. The break in gas prices may not be as pronounced at the pump as one might like. DTN is reporting that spot ethanol prices in U.S. markets were higher on talk, and BNSF railway increased freight rates on its CPC-1232 railcars, which typically carry crude. "I had one of my guys say that BNSF increased his CPC-1232 crude manifest rates by 100%," an ethanol trader told DTN. "They aren't closing themselves to business, but they are just way overpricing manifest moves to the point where there is no more money left in the arb." 

Natural gas is still being supported by endless summer heat, but summers days are numbered. Demand weakness and record production should mean this market is on borrowed time.

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.