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The Energy Report: Biden Tariff Squeeze

Published 05/15/2024, 09:54 AM

The timing of Biden’s directing his trade representative to increase tariffs under Section 301 of the Trade Act of 1974 on $18 billion of imports from China helped light a fire under an already tight industrial metal market that helped play a part in an epic copper market squeeze as well as inspiring panic buying in other metals like platinum and now more buying in gold and silver

This comes against a backdrop of an oil market that is trying to assess a prediction by the International Energy Agency (IEA) that is predicting that world oil production will increase by 580,000 bpd this year to record 102.7 million bpd and a prediction that global oil demand will hit an all-time high next year of 102,7 million barrels a day. The market also received a supportive report from the American Petroleum Institute (API).

The tightening global copper market has been an issue for some time and the market went over the edge after the report of the Biden sanctions spread trading between the front end of the curve and the back month made a record-breaking one-day move. Bloomberg reported that “The sharp price move has been tightly focused on the most-active July contract on Comex. The expanded premium of that price over copper on other global exchanges — and the need for shorts to deliver metal against their positions — is already prompting a rush by traders in China to arrange shipments to Comex warehouses in the US.

“The short squeeze is set to continue as traders might not be able to ship enough metal from either Chinese bonded warehouses or from Europe ahead of the delivery date,” Jia Zheng, head of trading at Shanghai Dongwu Jiuying Investment Management Co., said.

Supplies of copper are going to be even tighter as buyers move to secure supply before Biden’s Chinese sanctions go in place. That added uncertainty is raising questions as to how the sanctions on electric vehicle components could tighten the market forward copper and other metals. 

Aluminum and steel did not move as much because the demand for those two commodities isn’t as strong but for markets that are not as tight as compared to platinum, Palladium, and copper. The impact of the sanctions cannot be underestimated surrounding the historic moves. The Biden sanctions we’re like throwing a lit match on gasoline in a market where supply issues are already apparent.

It also raises the specter of inflation which was a major focus for oil traders yesterday. The PPI, especially month over month, came out higher than expected but both Federal Reserve Chairman Jerome Powell and other fed speakers seemed to suggest that the Fed was not considering an interest rate hike and at the very worst case, the heating of inflation most likely would lead to the Fed standing pat on rates. We’ll see how hot today's CPI is.

The market did get some supportive data from the American Petroleum Institute. API reported a larger than expected 3.104 million barrel drop in crude supplies. That probably suggests that refiners are starting to kick into high gear, and it could be the first of many draws as we get into the heart of the summer driving season. The API also reported a 1.269 million barrel drop in gasoline inventories and a 349,000 barrel increase in distillate inventories. We also saw a drop of 601,000 in the Cushing, OK delivery point which is the first draw in a while.

The International Energy Agency surprisingly lowered their demand forecast this year by 140,000 barrels a day mainly because of what they say was weak demand out of Europe. Yet for next year, their demand forecast is an increase of 1.2 million barrels a day which is slightly higher than their last forecast. The IEA says that they believe that the oil market looks more balanced overall in 2025 and they say that if OPEC voluntary production cuts were to stay in their place, they still think global oil supplies could rise by 1.8 million barrels a day compared to a 580,000 barrel increase in 2024.

The IEA points to the increase in supply coming with a big jump in offshore oil storage, yet their data seems to contradict other data that shows that we’ve seen a dramatic drop in offshore oil storage in recent weeks. I guess it comes down to who do you believe, Bloomberg or the International Energy Agency? Or is the IEA running behind? Bloomberg reported that oil in floating storage is at the lowest level since February of 2020, falling to only 55.92 million barrels as of May 10. This data came from Bloomberg News which reported a stunning drop in floating storage of 11% since just last week.

The IEA said that “Global oil inventories surged by 34.6 mb in March, as oil on water swelled to a fresh post-pandemic high. On-land stocks fell by 5.1 mb to their lowest level since at least 2016, as total OECD stocks declined by 8.8 mb to a 20-year low while non-OECD inventories built for the first time since November. According to preliminary data, global oil stocks rose further in April.

For some strange reason, it appeared that oil prices dropped after OPEC announced that it’s likely to hold its June 1st policy meeting online. To me the online meeting would suggest that there doesn’t seem to be any anticipation of any real friction at the meeting. But the market is a little bit nervous.

The market is also keeping an eye on wildfires in Alberta that could impact production. We have seen wildfires in the past shut down production and do a lot of damage so we’re praying for the people in Canada.

Natural gas is still recovering on hopes for more LNG exports. Technically the markets had a very good month as it has come back from the lows. Hopefully a few weeks ago when we’re recommending buying calls, people took advantage of that.

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