The Energy Report 12/03/18

Give Trade A Chance


All we are saying is give trade a chance. A trade truce with China and an OPEC deal to cut supply with Russia is sending oil and the rest of the commodity world on a rampage. Not only did the trade truce increase demand expectations for oil, the crash in price forced OPEC and Russia into a production cut deal, rumored to be 1.5 million barrels. The crash in oil even caused Canada to call on Alberta oil  producers to cut production to try to save its oversupplied blend and cheap priced crude. I wonder if President Trump is going to tweet about that? To add even more drama to this game changing weekend, Qatar announces it was withdrawing from the Organization of Petroleum Exporting Countries “OPEC” effective 1 January 2019.


So is oil going up more because of the trade truce or the OPEC plus Russia and now I guess Canada production cut? So now does Canada cutting production mean the oil cutting coalition is “OPEC plus 2” now? Well the answer is both. The Trade truce is something the markets have been clamoring for and now they are going to get it. This will improve global business confidence and open the door for even better global trade in the future.


President of the United States, Donald J. Trump and China’s President Xi Jinping, according to the White House on Trade, agreed that on January 1, 2019, the U.S. will leave the tariffs on $200 billion worth of product at the 10% rate, and not raise it to 25% at this time. China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural products from our farmers immediately.


President Trump and President Xi also agreed to “immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%”.


This helped U.S. grain markets as prices surged. This also helped energy as ethanol prices will respond in kind. Farmers across the U.S are breathing a sigh of relief and this should give a boost to meats and even precious metals. The Dollar fell on the news and that should boost the markets. All and all, this deal should be a game changer for most commodities.


Oil is also pleased that OPEC and Russia came to a deal. The Russians kept the Saudis in suspense but at the end of the day, partners in crime, high fiving Russian President Vladimir Putin and Saudi Crown Prince Mohammed Bin Salman agreed to cut output, reversing the recent oil price crash. Now the market will have to judge whether it is going to be enough and with a trade deal, it probably will be.


Qatar wants out. The main reason they say, is because they want to focus on increasing their natural gas production and not be hampered by OPEC production restraints. Some worry that the tension between Saudi Arabia, the United Arab Emirates (UAE), Egypt and Bahrain after a diplomatic blockade against Qatar is the main reason but Qatar says no.  “The withdrawal decision reflects Qatar’s desire to focus its efforts on plans to develop and increase its natural gas production from 77 million tons per year to 110 million tons in the coming years. Besides, their oil production has faltered in recent years. Also, Qatar must maintain its competitive edge in the global LNG market because of the upstart U.S. export market.


While OPEC may have lost Qatar, it looks like they picked up Canada. Ok, not officially but does it matter? The Premier of Alberta, Rachel Notley announced an 8.7 per cent cut in the production of raw crude oil and bitumen, starting in January, until excess oil in storage is drawn down. The reduction would then drop to 95,000 barrels a day until the end of next year at the latest. Alberta crude has tanked due to rising production and the lack of pipeline capacity.


Yet, is this move going to upset oil producers and free marketers? Ms. Motley said that “In Alberta, we believe that markets are the best way to set prices,but when markets aren’t working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act.” So, join in on price collusion with OPEC.


Natural gas is falling as winter weather eases and U.S. production soars. Sanity is returning to energy. Maybe now we can talk about record U.S. petro-exports and natural gas exports. Maybe we can talk about U.S. producers cutting back. The Baker Hughes rig count fell -3 to 1,076 last week. Oil rigs were up +2 to 887. Gas rigs were down -5 to 189. Time to see if we can maintain the rally and that should mean the lows for the month in petro should be in and a top in natural gas.


Our prayers are with the family of President George Herbert Walker Bush. During the Persian Gulf War, he arranged a phenomenal international coalition against an aggressor that put U.S. interests at risk. The equity markets will close in his memory on Wednesday. God bless him and his family.


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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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