The Trump Administration has a knack for cooling down oil prices every time they look to be getting out of control. Trade-war talk, potential wavers on Iranian oil embargo, and telling Germany that they are captive to Russia because of the reliance on them for energy supply, not to mention the resumption of some Libyan oil exports cooled off prices as they were boiling over due to rapidly falling U.S. supply.
We remember President Trump’s tweet before Memorial Day that OPEC had to get the price of oil down and shortly thereafter Russia and Saudi Arabia meet to engineer a production increase and caused a big drop in oil price. Then again, around the Fourth of July.
Oil prices were on a tear yesterday as the market was concerned about the continuing loss of supply from Libya, Venezuela and Canada, to name a few, only to have U.S. secretary of State Mike Pompeo cool off prices by saying that the U.S. would consider requests from a handful of nations for relief from U.S. sanctions for buying oil from Iran. That report, from Sky News, caused oil to pull back from a hefty gain and even go lower on the day.
Yet, we all know that there was always talk about wavers on a case by case basis and just because a handful of countries took the U.S. up on that, it should not really make a big difference as most buyers of Iranian oil are going to honor U.S. sanctions. Besides we do not know if these so- called wavers are permanent or temporary.
So then for oil, for the moment, it was back to supply and demand and according to the American Petroleum Institute (API) supplies of crude are falling hard and fast. The API reported a massive 6.796 million-barrel crude oil draw. The impact from the Suncor Canadian oil sands outage is really taking its toll as we saw a whopping 1.925 million barrels drop in crude supply in Cushing Oklahoma. The Gulf Coast also saw a big draw as there is no sign of weak demand despite some folks touting those worries. Gasoline supply fell by 1.59 million barrels and distillate supply increased by 1.952 million barrels.
That bullish API report sent oil higher until we heard from President Trump. Once again, while prices were rising he sent them back down by announcing 200 billion in new tariffs on China that will go into effect in August. That report took oil from a risk on to a risk off situation. Yet, despite the President’s best efforts to cool the market, we are still in a dangerously tight global oil market.
He is not trying to cool off tensions with Europe. He accused Germany of colluding with the Russians. Well not really. The USA Today reports that President Donald Trump slammed European allies at a summit of NATO leaders on Wednesday, singling out the biggest of them for economic ties to Russia while skimping on defense. "Germany, as far I’m concerned, is captive to Russia," Trump said. The source of Trump's ire: German support for a pipeline that would bring Russian natural gas through the Baltic Sea to central Europe — even as it spends just 1.24 percent toward the collective defense of NATO allies. “I think it’s very sad when Germany makes a massive oil and gas deal with Russia … we’re supposed to be guarding against Russia and Germany goes out and pays billions and billions of dollars a year to Russia," Trump said. He could also add that the U.S. is in the process of ramping up U.S. natural gas LNG exports to rid the U.S. of a growing natural gas glut. German Defense Minister Ursula von der Leyen said she didn't understand Trump's comments. “We have a lot of issues with Russia without any doubt,” she said.
Oil also saw some price relief from a report that the National Oil Corporation (NOC) announced the lifting of force majeure in the ports of Ras Lanuf, Es Sider, Hariga and Zuetina after the facilities were handed over to the corporation this morning, July 11, 2018. Production and export operations will return to normal levels within the next few hours. We will keep an eye on this.
Many businesses are still trying to adjust to higher prices. Many that bought into that false lower for longer narrative a few years ago are still under hedged. The truth is that even with the ups and downs day to day we are in a super cycle on oil. Businesses should get hedged with long term bullish strategies with futures or options as we have been recommending for the last few years. Long term this bull market is far from over. We have compared the double bottom at $26 a barrel to a generational bottom. It was like the same bottom that we had in oil in 1999 at around $10 a barrel. Based on historical norms that is why we called for a move to $84 dollars a barrel this year and we should see oil in the mid-nineties next year. We will see triple digits in oil in 2020, which has been our forecast and remains so.
This comes as the Energy Information Administration (EIA) forecast that Brent crude oil spot prices to remain above $70 per barrel this year. Production growth in the United States, Brazil, Canada, and Russia will make up most of total global supply growth in 2019. “Non-OECD countries, led by China and India, are contributing significantly to increases in the global consumption of petroleum and other liquid fuels. The United States is also experiencing strong liquid fuels consumption growth, as the economy continues to expand.” “Net crude oil and petroleum product imports into the United States have continued historic declines in 2018, and EIA’s outlook is that those declines will continue in 2019. Net imports are forecast to decrease from 3.7 million barrels per day in 2017 to 2.4 million barrels per day in 2018, a year-over-year drop of 35%.”
“The July STEO keeps the forecast for U.S. crude and petroleum product net imports for 2019 unchanged from June’s outlook. At an expected 1.6 million barrels per day next year, the United States will reach net import levels not seen since 1958.”
“In 2019, EIA forecasts that the United States will average nearly 12 million barrels of crude oil production per day. If the forecast holds, that would make the U.S. the world’s leading producer of crude.”
EIA forecasts that U.S. motor gasoline consumption will decline slightly in 2018 and then grow in 2019, increasing by 0.5% from 2018 levels. If EIA’s projected growth in 2019 is realized, it would be the highest level of annual average gasoline consumption on record, slightly surpassing the previous record set in 2017.” “EIA expects that monthly average gasoline prices peaked in May and will decline gradually in the coming months to an average of $2.83 per gallon in September.”
For Natural gas “The July outlook continues to forecast record production for U.S. dry natural gas in 2018 and 2019. Assuming the forecast holds, we will see production top 81 billion cubic feet per day in 2018, and another increase that will push production up to roughly 84 billion cubic feet in 2019.”
“Growth in production enables EIA’s forecast of LNG and pipeline exports from the United States to expand.” “Net natural gas pipeline imports from Canada continue to decrease in EIA’s July outlook. New infrastructure and increased exports from the Appalachia basin to the U.S. Midwest and Canada are behind much of the decrease.”
Speaking of Nat gas exports, the CME group announced that CME Group (NASDAQ:CME) and Cheniere Energy (NYSE:LNG), a pioneer in the liquefaction and export of U.S. liquefied natural gas (LNG), reached an agreement through which the CME Group will develop an LNG futures contract with physical delivery to Cheniere's Sabine Pass terminal on the U.S. Gulf Coast. "In recent years, the shale revolution has unlocked abundant supplies of natural gas here in the U.S., creating new risks and opportunities for producers, processors, consumers and traders," said Peter Keavy, CME Group Global Head of Energy. "Through its Sabine Pass liquefaction facility, Cheniere is delivering Henry Hub-indexed natural gas to the world in the form of LNG. This agreement with Cheniere is significant because it will be the foundation for developing a new LNG risk management tool for producers, consumers and traders around the globe, while further cementing the role of Henry Hub Natural Gas futures as the global gas pricing benchmark."
Cheniere's Sabine Pass LNG terminal first started exports in February 2016, and currently operates four trains capable of producing 18 million metric tons of LNG per year. A fifth train is under construction and a sixth is fully permitted and shovel-ready, representing up to 27 million metric tons per year of LNG capacity at the site. Cheniere is also constructing a separate LNG export facility outside of Corpus Christi, Texas.
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