Crude March Madness

03/22/2019 10:48 am EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Energy markets are experiencing their own March Madness, notes Phil Flynn, senior market analyst at Price Futures Group Phil Flynn.

It’s a slow ride on a March Madness Friday as oil pulls back a bit on global slowdown fears. Crude oil prices were up early, then dipped on slowdown fears. Let’s face facts; it has been a few days since we were worried about a slowdown in the economy so why not worry again today? We may have some reason to worry, especially if you look at the terrible German Manufacturing data that missed this morning, big time. The IHS Markit’s Purchasing Managers’ Index plunged to 44.7, the lowest tick since 2012 and well below economists’ expectation of 48. That’s the third consecutive reading below 50, which indicates contraction and it came as new orders and employment declined. Not too good.

Also, reports that President Donald Trump is downplaying any quick U.S.-China trade deal ahead of key meetings this week in China. Bloomberg News reports that President Trump has said that he wants an agreement that could be enforced, not a quick deal. U.S. Trade Representative Robert Lighthizer, who is leading the talks for Trump, and Treasury Secretary Steven Mnuchin will travel to Beijing for meetings at the end of next week, and Chinese Vice Premier Liu He will then come to Washington in April to continue the discussions, the Chinese Ministry of Commerce said on Thursday.

Yet that may not really impact U.S. oil inventories in the short term The United States is not getting any oil from Venezuela, and Saudi oil supply to the United States is also drying up. At the same time, the United States is exporting near record amounts of light crude that U.S. refiners have too much of. While we may see some snap back adjustment in supply, we are headed towards a very tight U.S. market. We will see more drops in gasoline and distillate, and we are going to see all major categories of supply fall below the five-year average. U.S. demand will stay strong as the Federal Reserve will keep rates low and consumer wages high. 

And you still have Iranian sanctions to deal with. Oilprice.com is reporting that “Iranian customers have started negotiations with the United States on possible waiver extensions to continue buying oil from Tehran. Iran’s oil exports, so far in March, are down from January and February to an average around 1 to 1.1 million barrels-per-day, Reuters reported on Thursday, citing industry sources and ship-tracking data. This compares to around 1.3 million barrels-per-day estimated Iranian exports for February. The U.S. waivers for eight key Iranian oil customers, including China, India, Japan, and South Korea, expire in early May. While the U.S. Administration says that it continues to pursue zero Iranian oil exports, analysts expect Washington to extend waivers to at least a few of the currently exempted buyers, with reduced volumes allowed under the new waivers, as the Administration wouldn’t want to push oil prices too high.”

Ags & Ethanol

Floods are having a big impact on agricultural markers. Reuters is reporting that “Massive flooding in the U.S. Midwest has knocked out roughly 13% of the nation’s ethanol production capacity, as plants in Nebraska, Iowa and South Dakota have been forced to shut down or scale back production following the devastation. Production facilities owned by large companies like Archer Daniels Midland Co. and Green Plains Inc. were still operating despite days of snowstorms followed by rains that sent record floods into the Farm Belt.

However, with rail lines washed out, and corn in storage flooded, production is dropping off, sending prices spiking in markets that buy the corn-based fuel. The United States has some 200 ethanol plants capable of producing 1.06 million barrels-per-day, and about 100,000 to 140,000 barrels-per-day of capacity has been taken off line due to the floods, according to three traders who track operations.”

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