The Fundamentals of Fear
Another smack down in oil based on fear fundamentals not actually supply and demand. The oil market gave into anxiety instead of focusing on fundamentals that in a less fearful world would be supportive. Oil's late day dive came after British Prime Minister Theresa May postponed a key parliamentary vote on her Brexit deal and sank oil and UK oil companies. This comes as we have ongoing doubts and jitters about the U.S. trade dispute with China. Yet, from an oil reality standpoint we have a lot of supportive things that the market seems oblivious to.
For example, despite China slowdown fears in November they imported a record amount of oil. China’s crude oil imports averaged more than 10 million bpd for the first time ever in November, averaging an all-time high of 10.43 million bpd last month, up by 8.5 percent compared to November 2017. The market ignored the fact that Libya’s largest oil field was shut in after an armed group over the weekend took over and shut it in. Libya declared a state of force majeure after the shutdown of the Sharara field. Bloomberg reports that this will result in a production loss of 315,000 bpd according to the state energy producer National Oil Corp. website. Sharara is operated by a joint venture between the NOC and Total, Repsol (MC:REP), OMV AG PK (OTC:OMVKY) and Equinor, known formerly as Statoil (OL:EQNR). The halt will also reduce Libya’s output by an additional 73,000 bpd at the El-Feel, or Elephant, field due to its dependence on Sharara for electricity supply, the NOC said Monday. El-Feel is operated by a joint venture between Eni and the NOC. Force majeure is a legal clause protecting a party from liability if it can’t fulfill a contract for reasons beyond its control.
This adds to the production losses from OPEC that along with Russia has agreed to cut by 1.2 million barrels a day. Alberta cut by 300,000 barrels plus per day and now we are losing another 315,000 from Libya. While some doubt OPEC and Russia’s commitment to compliance, they really should not. Already private tanker services are suggesting that the Saudis have already reduced oil exports significantly.
On top of that the U.S. is exporting a record amount of oil and products out of the country. U.S. demand is robust, and we should see a very significant 4 million barrel plus drawdown in weekly inventory. The sales of oil from the U.S. Strategic Petroleum Reserves should be finished so we can see numbers that are not suckered to the downside by SPR (NYSE:SPR) sales.
Yet, it is fear that has been ruling trade. Not only in oil but stocks as well. The Wall Street Journal reports,
Wall Street’s fear gauge settled lower Monday after erasing earlier gains—a sign investors are closely monitoring market signals on future volatility and adjusting options positions accordingly. The Cboe Volatility Index, known as VIX, fell to 22.64, snapping a three-session streak of gains. The measure earlier climbed as high as 25.94, putting it on track to surpass a closing high reached in October. The VIX also closed above the level of 15 for the 44th day in a row, continuing its longest such stretch since March 2016. The streak indicates investors are increasingly preoccupied with broader risks in the equity market and less inclined to use selloffs as opportunities to load up on more shares.
Yet, is fear the best trade gauge? Sometimes if you are too fearful, your fears become realties even in a world where things are good right now. Fears could go away if we see any progress on the U.S. China trade front. Reuters is reporting,
Unless U.S.- China trade talks wrap up successfully by March 1, new tariffs will be imposed. U.S. Trade Representative Robert Lighthizer said on Sunday, clarifying there is a “hard deadline” after a week of seeming confusion among President Donald Trump and his advisers.
Yet the Investor Business Daily says that despite anger over the arrest of Huawei (SZ:002502) CFO Meng Wanzhou, Chinese President Xi Jinping appears intent on meeting commitments made in his Argentina dinner with Trump. China may be able to weather Trump tariffs, but its vulnerability to a freeze-out of U.S. technology provides every reason to expect that a deal will happen. Trump wants to score a victory and almost settled for a quite modest one in May. ZeroHedge reports that just minutes after stocks and yuan legged down at the China open, MOFCOM issued a statement confirming that China's Vice Premier Liu He had spoken with U.S. Treasury Secretary Mnuchin and U.S. Trade Representative Lighthizer. The two sides exchanged views on the implementation of the consensus on the meeting between the two heads of state and the promotion of the next economic and trade consultations. And just like that, traders (and their algos) grabbed the slippery olive branch of hope and bid both U.S. Futures and USD/CNY notably higher.
So, if the market gives into more fear then oil might go lower in the short term, yet we should see big draws and strong demand numbers on crude that should lend support. Use the market weakness to get hedged because we are on a path to being under supplied in the new year.