China Colored Glasses

10/10/2019 12:05 pm EST

Focus: GLOBAL

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

As crude oil prices get whipsawed by on again/off again reports of US-China trade progress, crude oil fundamentals are building a strong bullish argument, reports Phil Flynn.

Oil traders are looking at the world through China colored glasses. Made in China of course. Just when you thought trading oil could not get any crazier, conflicting headlines on U.S.-China trade talks, along with Energy Information Administration (EIA) data that shows oil demand exploding while refiner runs are plunging, is causing whipsaw moves. Liberal lunacy has the lights out in California and is causing sharp rises in gas prices, but the growing homeless population does not seem to care. While the market is fixated on slowing global economic numbers, buyers of heating oil and diesel better hope for a slowdown because despite the talk of slowing demand supply is at very uncomfortable levels.

Oil on the opening of the electronic session tested the lower end of the trading range on a report from the Honk Kong Press that “US-China talks are expected to last for only one day! No progress made.” The headline caused global market turmoil until later when the headline was denied. Markets came back on a Bloomberg report that “U.S. Weighs Currency Pact with China as Part of Partial Deal”. There is also reports that China will ask US to end sanctions on its top shipper in trade talks.  It is clear that the markets believe the outcome of the U.S.-China trade talks are the most important thing on the planet and the outcome of these talks will either allow an explosion of global economic growth or a deep dark recession.

Yet beyond the U.S.-China trade take hysteria, we actually have oil data to look at. Does anyone seem to care about the fact that U.S. distillate stocks have fallen 9% below the five -year average? Does anyone question the talk of slowing petroleum demand when the EIA reports that total petroleum demand based on products supplied averaged 20.9 million barrels per day, up by 3.0% from the same period last year? Is anyone concerned that as we head into winter that heating oil supply is 26% below the five -year average as refining activity slowed to 15.7 million barrels a day and only 85.7% of capacity? Does anyone stop to ask the question if the U.S. is producing record amounts 12.6 million barrels of crude why supply in storage is just at the five- year average? It’s obvious that record U.S. exports are at play but with rig counts falling and reports that shale wells are procuring less barrel per well, does anyone question whether production growth can continue?

Is the market, that is fixated on China and Fed policy, ignoring the real possibility of a U.S. oil supply squeeze? The way things are going the country might start looking a bit like California. Ok maybe it’s not a popular position in the energy space and maybe these questions might get me banned in China. Yet I think they are questions worth answering. It is also why, despite the increasing bearish calls by many analysts, that I believe oil is building a base and we will head higher. Refiners are going to have to ramp up soon to meet demand and get supply back up. Demand will rise with early cold front as well as the fact that the U.S. consumer is not slowing down. Not in their cars anyway, as U.S. gasoline demand averaged 9.2 million barrels per day, up by 0.5% from the same period a year ago.

Oil is getting support on OPEC headlines. OPEC Secretary General Barkindo says that when it comes to oil prices that “There is no cause for alarm, OPEC+ committed to avoid slump.” That came as OPEC cuts forecast for 2020 non-OPEC supply growth by 50,000 barrels-per-day to 2.2 million barrels per day. In other words, lower output. OPEC cut its 2019 demand growth forecast to 980.000 barrel a day, It keeps 2020 growth forecast at 1.08 million barrels a day. OPEC revises 2020 demand for its crude upward by 200,000 bpd to 29.6 million barrels per day 1.2 million barrel per day lower than 2019 level.      

When the lights go out in the city

California Governor Gavin Newsome is upset, Trump is tweeting as California’s crazy anti-energy policies are leaving them in the dark. The AP reported that “More than a million people in California were without electricity Wednesday as the state’s largest utility pulled the plug to prevent a repeat of the past two years when windblown power lines sparked deadly wildfires that destroyed thousands of homes. The unpopular move that disrupted daily life — prompted by forecasts calling for dry, gusty weather — came after catastrophic fires sent Pacific Gas & Electric Co. into bankruptcy and forced it to take more aggressive steps to prevent blazes. The drastic measure caused long lines at supermarkets and hardware stores as people rushed to buy ice, coolers, flashlights and batteries across a swath of Northern California. Cars backed up at traffic lights that had gone dark. Schools and universities canceled classes. And many businesses closed.”

Newsom said Wednesday he’s “outraged” over Pacific Gas and Electric Co. shut offs, blaming decades of mismanagement at the utility. Of course, the politicians in California that have regulated the utility claim no responsibility. Gas prices in California are an issue as well hitting $4.18 a gallon for an average on tight refining issues as well as a lack of exports from Saudi Arabia. President Trump Tweeted that “Gasoline Prices in the State of California are much higher than anywhere else in the Nation ($2.50 vs. $4.50). I guess those very expensive and unsafe cars that they are mandating just aren’t doing the trick! Don’t worry California, relief is on the way. The State doesn’t get it! Newsome shot back that "You have no credibility on this issue," Newsom tweeted at Trump. "You’re trying to gut our emissions laws. Deny climate change. And wreck our environment by burning the dirtiest possible energy sources." In the meantime, the country gets to take a look at how liberal anti-energy policies, or a taste of the New green Deal might impact our daily lives in the future.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn

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