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With Mexico Tariffs, Trump Goes A Step Further In Killing Oil Rally

By Investing.com (Barani Krishnan/Investing.com)CommoditiesMay 31, 2019 04:19AM ET
www.investing.com/analysis/with-mexico-tariffs-trump-goes-a-step-further-in-killing-oil-rally-200426908
With Mexico Tariffs, Trump Goes A Step Further In Killing Oil Rally
By Investing.com (Barani Krishnan/Investing.com)   |  May 31, 2019 04:19AM ET
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From fund managers in Connecticut holding long contracts of oil worth millions of dollars to powerful energy ministers in the Middle East in charge of billions of barrels of their countries’ crude supply, the most important question this summer might be: “What damage could Donald Trump do next to my best-laid plans?”

From merely tweeting his hope for lower oil prices, the U.S. President has become the biggest disruptor of this year’s oil rally. Once cheered for his sanctions against Iran and Venezuela that helped add hefty premiums to crude, Trump is now the one individual feared by oil bulls of all stripes.

WTI 300-Min Chart - Powered by TradingView
WTI 300-Min Chart - Powered by TradingView

While he’s still doubling down on Venezuelan sanctions, the president’s more conciliatory move towards Iran lately and increasingly belligerent tone on trade with China have been a double dose of pain for both oil-producing countries and proponents of the long game in crude, who lose each time prices fall. And both the U.S. West Texas Intermediate and U.K. Brent benchmarks are set for losses of 10% or more in May, their worst drop since November, due in no small part to Trump’s actions.

Trump: The Gift That Never Stops Giving For Oil Bears

With his decision on Thursday to impose a 5% tariff on all imported goods from Mexico beginning on June 10, and “gradually increase” that tax to 25% until the flow of undocumented immigrants across the border stops, the Commander-in-Chief of the United States has strengthened the notion of himself as a gift that never stops giving for oil bears.

There’s good reason why many would have such a feeling, regardless of Trump’s nationalistic tendencies. Benchmark U.S. bond yields touched fresh lows and curves inverted in a warning of recession on Friday after the president’s latest assault on Mexico, which analysts say has the effect of “torpedoing” the U.S.-Mexico-Canada trade deal that he fought so hard to sign last year as replacement to the North American Free Trade Area agreement.

A global recession can never be good for oil, the commodity that literally moves the world. To make matters worse, China’s PMI Index, a super-important factory gauge, slumped more than expected on Friday. China, on its part, is ready to squeeze exports of precious rare earth minerals, used in everything from cellphones to military equipment, so that the U.S. will “feel” some of its pain.

Besides trade spats with China and Mexico, the Trump administration has also removed India—another giant economy with more than a billion consumers—from the U.S. Generalized System of Preferences, which gives favorable access to goods from developing countries. That decision is a “done deal”, which Washington says it won’t reconsider, despite its wish to do more business with the government of Narendra Modi, who was reelected this month as India’s Prime Minister in a landslide victory.

Striking At Oil During One Of Its Weakest Pre-Summers

But back to oil. Trump’s striking at a market that’s surprisingly having one of its weakest pre-summer demand periods. This is a time of the year that’s usually very good for consumption of gasoline and oil prices overall. For a third week in a row, the U.S. government issued a bearish dataset on oil on Thursday. While there was a crude drawdown of nearly 300,000 barrels this time versus unexpected builds of 5.0 million barrels in the two previous weeks, the drop was just a third of the level expected.

Refining margins for gasoline running at about 30% below levels from a year ago has been identified as one reason for the lackluster crude draw among refiners in the run-up to this summer. On a larger scale though, Trump’s antagonistic ways with countries that were once the best trading allies of the U.S. is slowly and surely killing the oil rally, say long-time watchers of the trade. “Trump's Mexico Tariffs Shows ‘No Country Is Safe’,” Bloomberg said in a Thursday headline about gold, which could have very well been written for oil. Sure, WTI and Brent are still up about 20% or more on the year. But there’s no telling where the market could be by the end of June if this bearish sentiment keeps up.

The bottomline is this: Trump loves cheap oil and that’s no secret. We at Investing.com believe that few things matter more to the president than keeping crude prices—and by extension of that, fuel prices at U.S. pumps—as low as possible until his bid for reelection in November 2020. That’s a long way to go, but he’s going to try—that’s our conviction.

Using The White House Office To Get Cheap Oil

The trouble for oil producers and market bulls is that Trump is using the cover of national interest via multiple trade conflicts to get that cheap oil.

John Kilduff, who as founding partner of New York energy hedge fund Again Capital has been both commentator and trader on this market for more than two decades, summed it up succinctly:

“Trump is basically using the office of the President of the United States to launch various unilateral actions to get what he wants.”

You can argue that it’s morally wrong. But by law, he’s acting in the legitimate interest of getting America the ‘best deal’, whatever that’s supposed to mean.

Most interestingly, he hasn’t sent out a single tweet about oil for weeks now while carrying out all these, so you can’t even accuse him of intentionally suppressing the market. He and his supporters will likely react with scorn if such charges are made, saying his greater efforts are being belittled. Or he might just shrug and say it’s all a coincidence, but a ‘good one’ nevertheless, since he’s been on record saying that high oil prices aren’t good for the world.

Oil bulls have no choice but to grit their teeth and see how far he goes.”

With Mexico Tariffs, Trump Goes A Step Further In Killing Oil Rally
 

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With Mexico Tariffs, Trump Goes A Step Further In Killing Oil Rally

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Comments (12)
dalbir singh
dalbir singh Jun 04, 2019 12:16PM ET
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crude can break 63 today
Dima Bedin
Dima Bedin Jun 02, 2019 7:58PM ET
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Thank you, Barani!
Hank Williams
Hank Williams Jun 01, 2019 5:08PM ET
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Might want to count the electoral votes of the oil states. Without them and California he does not win.
Barani Krishnan
Barani Krishnan Jun 01, 2019 5:08PM ET
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True, Hank. For now, the stats are on his side.
Hank Williams
Hank Williams May 31, 2019 6:58PM ET
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How low does oil have to go for KT to be happy?
Barani Krishnan
Barani Krishnan May 31, 2019 6:58PM ET
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He seemed quite happy when it was at $42 just before Christmas.
Hank Williams
Hank Williams May 31, 2019 1:11PM ET
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Do you think KT knows the US has an oil industry with voters.
Barani Krishnan
Barani Krishnan May 31, 2019 1:11PM ET
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That Trump knows that? Probably, but he's more concerned about the impact of gas prices on the average voter. That could make much of a difference in voting as history has shown. Very pricey gas = very moody voters.
Hank Williams
Hank Williams May 31, 2019 12:42PM ET
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Do you think KT
Barani Krishnan
Barani Krishnan May 31, 2019 12:42PM ET
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KT? Not sure, Hank.
Duy Nguyen Duc
Duy Nguyen Duc May 31, 2019 11:14AM ET
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the President really like to make oil bear. Can you explain what benifit US get from that issue? US also is oil exporter, right?
inderjeet virk
inderjeet virk May 31, 2019 9:38AM ET
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first ever men made recession is coming
Barani Krishnan
Barani Krishnan May 31, 2019 9:38AM ET
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On the contrary, all recessions are man-made, Inderjeet. Human decisions lead to greatness as well as ruin.
Duy Nguyen Duc
Duy Nguyen Duc May 31, 2019 9:28AM ET
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Why the double sanction applicatiin on Velezuela make the oil bear?
Barani Krishnan
Barani Krishnan May 31, 2019 9:28AM ET
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Doubling down on Venezuelan sanctions will tighten even further oil coming out of the PDVSA.
Barani Krishnan
Barani Krishnan May 31, 2019 9:28AM ET
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That will hurt the oil bears.
Duy Nguyen Duc
Duy Nguyen Duc May 31, 2019 9:28AM ET
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Thank you.
Ray Zilionis
RayZee May 31, 2019 8:21AM ET
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Great article Barani, i do beleive our POTUS has suffered immensly in attempting to do what he and many of us percieve to be necessary changes required to get America back on track. Let's face it Trump was a Billionaire with a wonderful life, he's now faced ridicule, investigations and a plethora of negative consequences all due to his innate desire for change and love of country. I too have had CL losses this week, but its a small invonvenience if we can MAGA.
Barani Krishnan
Barani Krishnan May 31, 2019 8:21AM ET
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It's wonderful that all the comments I've gotten on this have been rather complementary when I was actually expecting the opposite from those seared by the events of the past week. Again, it's truly admirable how some of you think, and I really wish you all the best for your noble thoughts in putting country first before yourself. I really hope all your positions -- long or short -- work out over the longer term. Have a wonderful weekend, everyone.
Barani Krishnan
Barani Krishnan May 31, 2019 8:21AM ET
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Thanks again, Ray, you can also follow me @barani_krishnan
Ray Zilionis
RayZee May 31, 2019 8:21AM ET
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Barani, Thank you
Tony Rice
Tony Rice May 31, 2019 8:19AM ET
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President Trump is doing a great job. The so-called disruptions are short term. It will be better in the long run.
Barani Krishnan
Barani Krishnan May 31, 2019 8:19AM ET
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Thanks for commenting, Tony. You can also follow me @barani_krishnan
Marshall Hiepler
Marshall Hiepler May 31, 2019 7:08AM ET
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Well, I agree that the impact on Oil Stocks is troublesome. Unlike some of the disassociated onlookers; I personally have been watching my Oil portfolio dwindle to the tune of nearly a grand in USD each week.But, its not about me, or other investors in the oil markets. The fact is, that somebody needed to take-on these neglected issues that have gone unchecked for decades. Yes, I do wish that trade adjustments with China could put an end to unequal export profits ... and to simultaneously pad my oil holdings. But, the long term gains for US manufacturing is worth my temporary discomforts. And, given a choice between paying for a boarder wall with my federal tax dollars, or prompting Mexico to address the problem proactively ... I guess I'm going to opt for the latter. I am not here to win a popularity contest. However, I do believe that the benefits for the many, outweigh the impositions for the few; myself being included in both those catagories.
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Barani Krishnan
Barani Krishnan May 31, 2019 7:08AM ET
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More interesting perspectives, Richard. Like Marshall, admire your stand, and hope your positions ultimately work for you.
Barani Krishnan
Barani Krishnan May 31, 2019 7:08AM ET
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Do continue reading/following here and @Investingcom. My personal handle is @barani_krishnan
Titus Polichnia
Titus Polichnia May 31, 2019 7:08AM ET
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as more electric cars hit the market, like mine, oil will dwindle even more. don't forget all the 18 wheelers that now use natural gas.
Barani Krishnan
Barani Krishnan May 31, 2019 7:08AM ET
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Yes, Titus, that's long-term disruption for sure. Do follow me @barani_krishnan
Marshall Hiepler
Marshall Hiepler May 31, 2019 7:08AM ET
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You make a good point, Titus. However, I suspect that your anticipated timeframe may be a bit exaggerated. The decline of global oil dependence will not be swift. There will certainly be a market recovery for oil investors who are patient. It may take six months or more, to see returns on those investments. But, in time, the transition from fossil fuels to electric based propulsion is bound to occur.
 
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