Energy & Rate Cut Revenge

08/07/2019 1:40 pm EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Crude oil prices continue to weaken due to concerns of a global economic slowdown despite bullish supply fundamentals, reports Phil Flynn.

Global interest rate cuts may once again change the mood of the crude oil market, that has been more erratic than usual.  A surprise 50-basis-point cut from New Zealand shocked some, as well as a cut from India’s central bank, which cut rates by 35 basis points to 5.40%. It is their fourth cut in a row, bigger that than the expected 25-basis point cut predicted. Thailand also cut rates. Even hawks are becoming doves as Federal Reserve Bank of St. Louis President James Bullard seemed to suggest that trade uncertainty should set the stage for another U.S. rate cut.

Even a bullish American Petroleum Institute (API) report initially did not show oil bulls any love until the rate cutting craze swept the globe. Oil seems to be ignoring a dramatic tightening of U.S. oil supply that is putting supplies below average and is instead focused on an oil glut to be named later. The API reported U.S. crude supply fell by 3.43 million barrels which is the eighth crude draw in a row, the longest stretch of supply drops since January 2018.

The numbers suggest decent demand for products as the API reported gasoline supply down 1.1 million barrels and distillate up 1.117 million barrels.

Yet tightening crude supply and strong U.S. demand doesn’t seem to be enough if you expect the global economy to crumble down around you. Despite bullish data, the mood was dour as headlines declared Brent crude closed in bear market territory. Of course, the last time that happened it was a screaming buy. Will this time be the same?

The real question is whether all the global economic stimulus by central banks can counter-act weakening economic data? History shows us that when central banks around the globe move to lower rates, it has always ultimately meant higher price for oil, eventually. Oil traders though at this point seem to doubt that, as they worry about weakening economic data. Notably weaker this morning in German manufacturing. Germany’s industrial production is falling at the fastest rate since 2009. Output fell -4.2% in April-June compared with the same period a year earlier according to Reuters.
China again set their reference rate at 6.9996. Lower than yesterday and below the 7.0 number that had the Trump Administration declare China a currency manipulator. A charge that China will now have to defend.

The Energy Information Administration (EIA) also lowered its outlook for U.S. oil production and for U.S. demand. They blamed the drop in U.S. output mainly on tropical storms and failed to address the growing doubts about their U.S. shale production outlook. The EIA highlights oil markets: “Despite the potential for supply disruptions around the world, EIA forecasts that Brent crude oil spot prices will remain relatively flat through the end of 2020, as EIA sees oil markets as being in relative balance next year.”

EIA’s August Short-Term Energy Outlook estimates a decrease in U.S. crude oil production in July due to the Gulf of Mexico storm Hurricane Barry. Increasing onshore production partially offset the decrease, driven by production increases in the Permian tight oil formations. “EIA continues to forecast record U.S. crude oil production in the August outlook, which projects U.S. production to exceed an average of 13 million barrels per day in 2020. If the forecast holds, U.S. oil production will have doubled since 2012.”

Reporting on natural gas, “EIA has decreased its 2019 forecast for Henry Hub spot prices as robust natural gas production has exceeded July’s forecast. EIA expects that the Henry Hub natural gas spot price will average $2.36 per million British thermal units in the second half of 2019. Despite the near-term reductions in prices, EIA expects natural gas prices to recover somewhat in 2020 because gas production models indicate that rising prices are required in the coming quarters to bring supply into balance with rising domestic and export demand in 2020.”

What trade war!

China is on board with the United States, at least when it comes to protecting their own interests. Reuters is reporting that, “China might escort Chinese commercial vessels in Gulf waters under a U.S. proposal for a maritime coalition to secure oil shipping lanes following attacks on tankers,” its envoy to the United Arab Emirates said on Tuesday.

Reuters also reported that Saudi Arabia Energy Minister Khalid Al-Falih met U.S. Energy Secretary Rick Perry on Tuesday in Washington and said both sides expressed concern over threats targeting freedom of maritime traffic in the Arabian Gulf. “The meeting…dealt with the two countries’ concern over threats targeting freedom of maritime traffic in the Arabian Gulf. We affirmed our determination to work together to ensure the security of global energy supplies,” Falih said in a series of tweets.

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