The Energy Report for Monday, July 29, 2019
Stuck in the Middle with You
Oil is stuck on the backburner as the markets all wait for the outcome of the U.S.-China trade talks. And of course, the Fed decision is looming large where it is widely expected that the Fed will cut rates for the first time since 2008. How time flies when you are having fun. We also will get the U.S. jobs report this week, not to mention other data from across the globe.
All that macro-economic anticipation is reminding us that oil prices are focused on global growth ideas for market direction. Oh sure, you still have big geo-political risk factors, mainly Iran, in the background but that is taking a back seat as we await data that has many people saying that this week is the most important week of the year for the global economy.
Yet while the oil market must assess global economic growth concerns, oil data out of China seems to suggest that talk of a global oil demand slowdown may be overstated. We saw a big surge in Chinese oil imports yet again.
Chinese customs data showed on Saturday that China imported 39,579,393 tons of oil, up 15.3% from a year ago. They also imported a whopping 37,718 tons of gasoline which was up sharply. What makes it more interesting is where a lot of that oil and gasoline came from. Not from Iran. China’s crude oil imports from Iran sank almost 60% in June from last year. Crude shipments from Iran were 855,638 tons last month, or 208,205 barrels per day (bpd), data from the General Administration of Customs showed. That compared with 254,016 bpd in May according to Reuters. So, it appears that Iran sanctions bite, at least as far as Iran is concerned. Not so much for Saudi Arabia.
Saudi Arabia was one of the major beneficiaries of the Iranian sanctions. Bloomberg News reports that China has tapped Saudi Arabia for a record volume of crude as the world’s biggest exporter plugs a shortage from sanctions-hit Iran. China shipped 7.72 million metric tons of crude, or 1.89 million barrels a day, from Saudi Arabia last month. Shipments from the Saudis made up about a fifth of its total oil purchases in June and was 64% higher than the previous month. Imports from Iran fell to the lowest since May 2010.
China also boosted its purchases from other key suppliers last month. Imports from Russia rose to 7.15 million tons, while shipments from Angola increased to 4.43 million tons. Imports from Venezuela climbed to 1.13 million tons, compared with almost 800,000 barrels in the previous month.
The oil market does have to start dealing with the reality that U.S. oil production is close to a peak for the time being. Reuters reported that drillers cut three oil rigs in the week to July 26, bringing the total count down to 776, the lowest since February 2018, General Electric Co’s Baker Hughes energy services firm said in its closely followed report on Friday. That compares with 861 rigs operating during the same week a year ago. Reuters points out that more than half the total U.S. oil rigs are in the Permian basin in West Texas and eastern New Mexico, where active units increased by three this week to 443 despite the national rig decline. The Permian is the biggest U.S. shale oil play. For the month, the rig count dropped by 17, its biggest decline since March. That put the count down for an eighth month in a row, its longest losing streak since May 2016 when the number of active rigs fell for a record nine consecutive months, according to Baker Hughes data going back to 1987.
Our basic case for oil is still more bullish than bearish. With the Fed looking to cut rates and the fact that oil demand is not nearly as weak as some would have you believe, it should bode well for the back half of the year. U.S. oil production is faltering and even though more supply due to pipeline expansion will come on, the boost from economic stimulus should be good.
Natural gas is turning into a bearish train wreck yet again. Overproduction and associated gas from oil is keeping the market oversupplied.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network