Supply Build & Trade War Concerns Trump Bulls in Crude Sell Off

05/24/2019 12:41 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Bearish supply builds caused crude oil to sell off heading into the high-demand Memorial Day weekend, reports Phil Flynn.

Oil price broke out to the downside of its recent trading range as the weight of increasing supply and concerns about a full-blown U.S.-China trade war had traders selling as they made their way out of the door for the Memorial Day Weekend. That made for the worst down day in six months. As luck would have it, the traditional Memorial Day sell off came almost right on cue, as the race to get the market supplied for what could be record breaking automobile travel this weekend started. And while a selloff around Memorial Day is kind of a tradition, it was not very clear until we saw bearish oil inventories and a reduction of risk from Iran that we would breakout to the downside of the recent range.

In fact we very easily could have bucked the trend and broke out to the upside if the tensions with Iran continued to run hot and if we did not see a crazy crude oil build that was enhanced by refinery outages, Houston Shipping Channel woes, as well as a big release from the Strategic Petroleum Reserve. Yet, what we have learned from downside breakouts around a holiday is that you don’t fight it. When oil took out the support it was time to get neutral or even short. While we may see more downside, next week the bulls will start to come back especially if weekend travel lives up to expectations. Stocks at some point will stabilize despite the China trade war threats, because despite the fear of a fallout from a trade war, the U.S. economy is strong, and it will adjust. 

Still some data is raising concerns that the U.S.-China trade war will slow global growth. Yesterday, as reported by Reuters: “U.S. manufacturing growth sputtered in May, measuring its weakest pace of activity in nearly a decade and new orders fell for the first time since August 2009 as the U.S.-China trade war intensified, data from IHS Markit showed on Thursday. In its flash Purchasing Managers Index for May, Markit said its U.S. Manufacturing PMI declined to 50.6 from a final reading of 52.6 in April, marking the lowest level since September 2009. Wall Street economists polled by Reuters had a consensus forecast of 52.5.”

One aspect on the U.S.-China trade war may actually inspire more oil demand, a farm bailout. The Trump Administration announced a $16 billion farm bailout package to help farmers hit by the trade conflict and may inspire them to plant their acres instead of walking away. Diesel demand has been weak because farmers in many places have not been able to plant, they might have decided to give up without government help.

The Wall Street Journal wrote “Some farm groups cheered the new aid package, saying it would help cushion the blow. “We thank President Trump for recognizing that our patriot farmers have borne the brunt of China’s trade retaliation,” said David Herring, a North Carolina pork producer and president of the National Pork Producers Council. Mr. Herring said U.S. pork producers were also anxious to reopen trade with China to take advantage of an “historic sales opportunity,” referring to the deadly virus that has decimated China’s hog herds and prompted buyers there to purchase more meat from U.S. producers. Others remained critical of trade conflicts that they said have exacerbated existing problems in the Farm Belt, namely excess production of agricultural goods that have driven commodity prices lower. “Our ongoing trade wars have destroyed our reputation as a reliable supplier and have left family farmers with swelling grain stores and empty pockets,” said Roger Johnson, president of the National Farmers Union. Agriculture Secretary Sonny Perdue said, “Farmers themselves will tell you they’d rather have trade than (government assistance) but in the absence of a deal they’ll need some support.”

While oil should attempt a rebound, we may not see a solid bottom till next week when we see traders get back from the Memorial Day Holiday. Yet with President Trump holding out olive branches to China to reopen trade talks that could change; if it looks like China might respond positively to his overtures.  What I am talking about is Huawei.

As reported by the Wall Street Journal “At a White House event with farmers, Mr. Trump said a deal with China was a “good possibility” but declined to give details. He said the U.S. campaign against Huawei could be up for negotiation, while also calling the telecom giant a “very dangerous” threat to national security. It’s possible that Huawei would be included in some kind of a trade deal,” he said.

Summer Driving

In the meantime, the summer driving season begins. According to AAA, this long holiday weekend will see the second-highest travel volume on record, trailing only the high set in 2005. (AAA first began tracking national holiday travel volumes in 2000). An additional 1.5 million people are expected to take to the nation’s roads, rails and runways compared with last year. We could shatter that record, especially if the weather holds up. Gas prices have stabilized as today’s AAA National Average clocks in at $2.845 a gallon for regular. 

My take is that we can’t get too comfortable that a top is in. While we appeared to have dialed down tensions with Iran, they could still ramp up. Also, we should start to see big draws in supply when refiners finally get their act together.

Natural Gas

Natural Gas also looks very heavy as production continues to rise! You can get free natural gas in the Permian Basin and reports by Natural Gas intelligence that suggest more production coming online. “The sudden downturn in Natural gas came as Genscape Inc. said flow data Tuesday indicated that operational capacity at the Equitrans Meter 24605 had been fully restored following a recent force majeure related to issues at the Mark West Mobley Plant in West Virginia. As of Tuesday’s, timely cycle, Equitrans flows from the Mobley facility had rebounded back up to 550 MMcf/d, higher than the prior 14-day average, according to analyst Anthony Ferrara. Nymex futures led the way as the June gas contract fell around 10¢ to $2.543 as of Wednesday. July dropped to $2.559.

This came as the Energy Information Administration reported that working gas in storage was 1,753 Bcf as of Friday, May 17, 2019. This represents a net increase of 100 Bcf from the previous week. Stocks were 137 Bcf higher than last year at this time and 274 Bcf below the five-year average of 2,027 Bcf. At 1,753 Bcf, total working gas is within the five-year historical range.

While the Memorial Day Holiday is usually considered to be the start of summer, it is also a very important day to remember those that gave all to give us our rights to life, liberty, and the pursuit of happiness. Remember to take time to pray for those that protected those rights and gave their lives so we could live free. God Bless them and God Bless their families. Thank you

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