Trade Trip Up
Oil prices got a scare on reports that chief economic advisor to President Donald Trump, Gary Cohn is resigning, raising fears that the world is on the brink of an all-out tariff and trade war. Gary Cohn, the former Goldman Sachs (NYSE:GS) banker, is said to be quitting because of his opposition to the steel and aluminum tariffs that President Trump has threatened to put in place. The fear for oil is that this trade trip up could derail the global demand growth for oil that is at the strongest level we have seen for decades. Oil was also shocked by a report of a big build in U.S. crude supply, as reported by the American Petroleum Institute, but that should be offset somewhat by an even more unexpected gasoline draw. The builds in crude and the drop in gas though is normal for this time of year as we are in the shoulder season. Refiners must retool, and we must draw down winter blends of gas and build up those summer time blends.
MarketWatch reported that the American Petroleum Institute reported that U.S. crude supplies rose 5.7 million barrels for the week ended March 2, according to sources. The API data also showed a decline of 4.5 million barrels in gasoline stockpiles, while inventories of distillates saw a climb of 1.5 million barrels, sources said. Supply data from the Energy Information Administration will be released Wednesday morning. Analysts polled by S&P Global Platts expect the EIA to report a climb of 2.5 million barrels for crude inventories. They also forecast declines of 500,000 barrels for gasoline and 1.6 million barrels for distillate supplies.
Despite trade war fears the story of oil has been in strong demand. While most kept focusing on supply they forget to focus on demand. Bloomberg News writes that “The strength of oil consumption took analysts by surprise last year and played a big role in crude’s recovery to a three-year high in January.” Demand this year could even turn out to be “way in excess” of 2017’s exuberant levels, Khalid al-Falih, the normally cautious energy minister of Saudi Arabia predicts. Data from industries like aviation, shipping and trucking suggest he might be right.
Bloomberg says that oil demand growth hasn’t been this strong in decades: even the gloomiest estimates from three heavyweights of global forecasting -- the International Energy Agency in Paris, (who talks their book) the U.S. Energy Information Agency, and the Organization of Petroleum Exporting Countries -- show consumption expanding by a minimum of 1.4 million barrels a day every year from 2015 to 2018. For part of that time, OPEC and allied producer states have been cutting crude supplies to eradicate a global glut. While a lot of that growth is being driven by consumers in emerging markets taking to the roads for the first time, the strongest run in global trade expansion for several years is also boosting demand as planes, trucks and ships move more goods around the world.
Though it may yet be at risk from the protectionist talk coming from Washington, the International Monetary Fund’s most recent estimates for world trade growth are that it will exceed 4 percent for three consecutive years through 2019, a feat last achieved when oil prices were surging to all-time records a decade ago, according to Bloomberg. Planes, trains and trucks: global trade boom fires up oil demand.
That of course is one reason oil fears a trade war. Yet, in China where the main target of Trumps anger is on trade, they seem to be making a measured response. If Trump can cut a deal on trade with China, then oil would soar.
U.S. gasoline demand will shatter records this summer. A strong economy will keep those gas tanks full. The seasonal low for RBOB futures should be very close. If the Energy Information Administration confirms the draw than that could be the low for the year on the summer grade RBOB prices. If you’re a buyer of gas you should get hedged as we see significant upside price risk this summer. The downside risk is a trade war but domestically that should take some time to impact U.S. drivers.
Another blast of winter out east and a bad winter globally should support heating fuels like ultra-low sulfur diesel as well as natural gas.
The EIA in their “Short Term Energy Outlook that following record high gas inventory withdrawals in early 2018, the short-term outlook estimates that inventories for March 2018 will total 1.481 billion cubic feet, which represents a nearly 28% drop from March 2017. In fact, March 2015 was the last time inventories came close to that level.” “EIA expects U.S. natural gas production to reach new records in 2018. The forecast suggests that production will near 82 billion cubic feet per day in 2018 and, as a consequence, inventory levels will fully recover from this year’s low levels by next winter.”