Phil Flynn breaks down crude oil fundamentals and geopolitical risk.
Crude oil has a Houston problem and is causing it to pull back from pre-oil price war highs. Not only did we get a massive 7.544 million barrel crude build reported by the American Petroleum Institute (API) probably from near Houston and the Gulf Coast, but also the U.S. government ordered the closure of China’s consulate in Houston, “in order to protect American intellectual property” and private information of U.S. citizens, according to the U.S. State Department.
This is raising fears that deteriorating relations between the U.S. and China could restart the U.S.-China trade war and take a toll on demand that is still trying to recover from the Covid-19 hit. Demand expectations had been rising on vaccine hopes but are now pausing with President Trump signaling that for Covid-19, it is probably going to get worse before it gets better.
Yet in the API, there were some signs of oil demand hope. The API reported that gasoline supply fell by 2.019 million barrels, signaling that perhaps some of the talks of a gasoline demand drop might be overstated. The API also said that distillate supply fell by 1.357 million barrels. The build of 7.544 million barrels almost erased last week’s massive crude draw. The tiebreaker will be the Energy Information Administration (EIA) and next week’s data, where we should start to see crude oil start to draw again. Another supportive footnote was the fact that the reported increase was only 716,000 barrels and smaller than the private forecasters were saying.
International demand expectations are getting a boost on reports that Japan is going to resume business travel with China, South Korea, and others. Yet that may be offset U.S.-China tensions surrounding the closing of its consulate and may make demand projections more difficult.
Oil was not the only thing burning in Houston. The Wall Street Journal reported, “In Houston, firefighters and police officers responded Tuesday evening to calls related to the Chinese consulate, where smoke was seen rising from an outdoor courtyard area, local police said. Footage aired by local television stations purportedly showed people burning documents on the consulate’s premises.”
China is not very happy. The Wall Street Journal reported that Washington’s demand, issued Tuesday, marked, “a political provocation unilaterally launched by the U.S.,” Chinese Foreign Ministry spokesman Wang Wenbin said Wednesday at a routine briefing in Beijing. “China urges the United States to immediately rescind its erroneous decision. Otherwise, China will undertake legitimate and necessary responses.”
If those responses are about trade, then get ready for another wild ride. We have had a few lately to say the least.
Yet can another shot of U.S. stimulus calm the waters. Fox News reported that Senate Majority Leader Mitch McConnell on Tuesday made clear he supports another round of stimulus checks to Americans. The economy needs “another shot of adrenaline” amid the Coronavirus pandemic, he said. McConnell, (R-Ky.), has been in negotiations with top congressional Democrats and the White House on what the next Coronavirus bill would look like, as the Trump administration is pushing a package with a price tag of $1 trillion. McConnell said he supports “another round of direct payments” to Americans – something President Trump and top members of his administration have said they, too, support.”
Nat Gas Update
The natural gas rally is fizzling. Andrew Weissman of EBW analytics reports that the natural gas front-month contract plummeted 20.1¢/MMBtu (-10.7%) over the past two weeks, even while extreme heat was blanketing the Lower 48. Despite power burns flirting with record highs, a combination of weak LNG demand, production gains, and ample salt storage supplies have been more than sufficient to absorb increased demand for natural gas while sending prices lower. Weissman says that the inability to rally reduces upside risks for NYMEX gas through mid-August—amid paltry LNG flows and falling power burn—and opens the window for shorts to meaningfully increase positions and attempt to break through support. By the end of the 30-45 day window, the fundamental picture may begin to brighten, but faltering physical flows are likely to keep NYMEX gas futures weak.
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. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn. Not a Subscriber but want to be? Here! I will be a speaker at the Money Show in Las Vegas! I look forward to seeing you there.