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Trade Wars & Shutdowns

02/11/2019 9:53 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Trade wars and government shut downs weigh on crude oil prices as we head into shoulder season., writes Phil Flynn, Senior Energy Analyst The PRICE Futures Group.

Trade wars and government shut downs weigh on crude oil prices as we head into shoulder season. The weak demand period is allowing the market some space as the risks to supply are still running very high. As of now, there is no real answer for a scenario of an extended loss of supply from Venezuela. The heavy crude prices continue to rise as refiners need the mix of the heavy to keep the globe supplied with the products it will so desperately need. Reuters shows how the market for heavy is tightening by reporting that Middle East oil benchmarks Dubai and DME Oman have gone above prices for Brent crude, an unusual move as U.S. sanctions on Venezuela and Iran, along with output cuts by OPEC, tighten supply of medium to heavy sour oil.

There are reports that Russia is working with Venezuela to hide oil revenue from the world market, trying to cause havoc in this part of the globe. Reuters reports that Venezuela’s state-run oil company PDVSA is telling customers of its joint ventures to deposit oil sales proceeds in an account recently opened at Russia's Gazprom bank AO, according to sources and an internal document seen by Reuters on Saturday. PDVSA's move comes after the United States imposed tough, new financial sanctions on Jan. 28 aimed at blocking Venezuela's President Nicolas Maduro's access to the country's oil revenue. 

Of course, there are still overriding concerns about the demand side as talks between Democrats and Republicans have finally broke down, raising the odds of another government shutdown. Fox News reported that “With less than a week to go until another potential partial federal government shutdown begins on Friday, bipartisan compromise talks on funding for President Trump's proposed border wall have completely broken down.

The development raised the possibility that Trump will declare a national emergency to access previously appropriated funds to initiate construction on a border wall. The White House agreed to a temporary spending bill late last month to end an historic 35-day government shutdown, although Trump said at the time that the move was not a "concession" and that he would not relent on his demands for a wall. "Talks have broken down because Senate Republicans are refusing to compromise on limits to the Trump administration’s cruel immigration policies," a senior Democratic aide told Fox News on Sunday. "A deal that includes new physical barriers must also include limits on the number of ICE detention beds. If Senate Republicans won’t compromise with us on both, we can’t reach a deal.” Added a GOP source: "The wall is a red herring for the Democrats. We got stuck on an interior enforcement cap." Such a cap would effectively limit ICE's ability to house illegal immigrants caught domestically by reducing the number of available beds in detention centers. The goal, Democrats say, is to force the Trump administration to prioritize arresting and deporting only violent criminals and dangerous offenders. Fox News is told if negotiators can’t resolve the situation soon, they are likely looking at trying to pass another temporary continuing resolution to try to avoid a shutdown.

Trade talks are the main issue for crude oil. Last week crude fell off after Larry Kudlow, director of the National Economic Council, said that the U.S. and China are still miles apart on a trade deal. While that comment may be just a negotiating tactic, the market took it seriously and went on to post its worst week of 2019. Yet, this morning Marketwatch reports that Asian stocks were mostly higher on Monday as traders watched for developments on a fresh round of trade talks between American and Chinese officials in Beijing this week. Markets in China and Taiwan, reopening after a weeklong Lunar New Year break, posted broad gains. So perhaps there is hope for a deal. If we get a deal, oil should get a quick $5 bounce.

OPEC cuts are starting to take its toll and U.S. demand is still robust. In fact, with all the talk of weakening economies globally, oil demand has held up quite well. U.S. production could slow as Baker Hughes reported U.S. rig count rose by only 4 rigs to 1,049 last week. While oil rigs did rise by 7 to 854 natural gas rigs fell by 3 to 195. The trends for both oil and gas rigs are decidedly lower over the last month.

Overall, we have some hurdles on the upside. Still, we predict that we will get a U.S.-China deal. We also feel that the loss of Venezuelan crude will support oil products. In the short term, we can see some range trading longer term with the combination of OPEC cuts, less heavy oil and a U.S. economy that will leave the market very tight as we look ahead to the switchover to the summer blends of gasoline. Be patient and strategic, but long term there is much more upside than downside.

Natural gas gapped up a bit as a return to cold temperatures is increasing demand expectations. Andy Weissman, Publisher and Editor-in-Chief of Market Quick Takes, says that over the weekend, projected space heating demand for this coming week continued to slide. The balance of February and the first week of March, however, gained more than 40 HDDs. This whopping increase is likely to push natural gas up significantly on Monday. With only seven to eight weeks left in the withdrawal season, the March gas contract is likely to struggle to reach resistance at $2.78/MMBtu. The return of cooler weather across the central and eastern U.S. could significantly bolster regional heating demand and power prices this week. Temperatures are likely to remain warmer than normal, however, moderating this increase.

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