Koch Industries decided to exit oil, a refined product, trading to seek ‘greener pastures’ to areas that have provided more attractive returns. What that decision says about oil and product market is significant. It shows that the big money for speculators is being made elsewhere. Let’s face it, compared to other markets like metals and softs, oil has been a bore. It has been locked in a Groundhog Day like trading range for what seems like forever.
In fact, recently you can make more money in coffee in 10 minutes than you can make an oil in a month. Or lose it. Bloomberg reports that Ukraine is ready to sign a natural resource deal with the United States, which may create opportunities in other markets despite current commodity struggles and concerns over weak Chinese data.
Oil and products have been stymied by fundamentals and inventories that are good enough to get by though not exactly overflowing. JODI reported that, “Oil demand in JODI-reporting countries rose in February by 2.1 mb/d m/m. The growth was driven mainly by higher demand in Italy, Germany, Chile, the US, India, Japan and the UK.
It is also being held back by uncertainty surrounding the tariff wars and the impact on global economic growth which is all about speculation and not really rooted in hard data. So, the market subsequently shifts to the current headline-driven concerns, resulting in significant fluctuations allowing the market to hurry up but go nowhere. And today those concerns seem to be leading oil into a sharp selloff getting below $60.00 a barrel. The selloff is a combination of end of the month position squaring by hedge funds along with data out of China that suggests that demand from that country could be hurt because of the tariff war.
The Wall Street Journal reported that China’s manufacturing activity or China’s PMI fell to 49, signaling contraction, while new export orders hit their lowest since December 2022 as the tariff war is taking its toll. The Journal say that Beijing faces pressure to boost stimulus and negotiate with the U.S. but remains defiant despite economic strain. In fact, one way they are fighting back is divesting from the US. Sources say Chinese sovereign fund CIC is selling its $1 billion U.S. private equity investment portfolio in the secondary market. Add to that a growing sense that OPEC is going to be willing to raise production at next week’s OPEC plus meeting which could turn a market that has been in a global supply deficit into a slight surplus.
And then there’s oil inventories. Today we get the Energy Information Administration (EIA) report on petroleum industry supply and demand and if you look at the American Petroleum Institute report it should be somewhat supportive. While the API didn’t report a surprise 3.76-million-barrel increase in crude supplies a larger than expected drop in gasoline inventories of 3.14 million barrels and a 2.52-million-barrel drop in distillates of 2.52 million barrels. They’re dropping product in the trays keep the crack spread’s solid even as it looks like oil is getting ready to fall off into the abyss. And for oil bulls there’s no way to soft soak this, the market action is looking horrible. WTI really needs to hold $58 a barrel or it could open up some extreme selling. Now we do have to put in perspective that it is the end of the month and that definitely could impact market moves today. We could end up reading too much into today’s moves.
The latest ADP jobs data, together with inflation information, could be crucial. If oil prices hold at current levels or drop to the low 50s, shale oil producers will significantly reduce output. This reduction would establish a price floor at $50 due to decreased US production, ultimately leading to market recovery. Stability in prices better serves both producers and consumers by avoiding extreme fluctuations. Low oil prices of course mean it will help reduce inflationary pressures.
The weakness in oil was sworn in as also bringing a little bit of weakness into natural gas. Natural gas sold off hard on shoulder season selling and rebounded as it looked like it started to look forward to a summer where supplies are going to be much tighter than they have been for years. Being below the five year average is far as supplies was driven by a colder than normal January and February and a nine percent increase in annual consumption for space heating year over year but we can’t underestimate the power of LNG exports that are projected to rise by 18% in 2025 to 14 BCF a day this of course is being driven by new terminals but also expectations of ever growing power sector demand.
Yes, the Trump administration pushes forward just stay the global leader in artificial intelligence should provide a long-term bullish outlook for natural gas and let’s face it if the prices of oil continue to be weak and we see cutbacks in production then the associated gas that has kept the market flush with supplies may start to be reduced.