The Energy Report 05/31/19
Oil Waivers on Waivers and Tariffs
I know what you are thinking, the Energy Information Administration (EIA) status report did see a less than spectacular crude oil draw, a build in gasoline supply, and gas demand that was probably down due to bad weather, but seriously? I mean the numbers were not that bad.
The EIA reported that U.S. commercial crude oil inventories fell by just 0.3 million barrels, less than expected, gasoline inventories increased by 2.2 million barrels, while distillate fuel inventories fell by 1. 6 million barrels. While the initial selling reaction to the EIA report was probably justified, the real reason for the magnitude of the late day sell-off was a Wall Street Journal article that raised questions about the Trump administration’s commitment of getting Iranian oil exports down to zero.
The Wall Street Journal at 12:26 eastern time released an article that said, “Countries that haven’t yet hit a U.S. limit on imports of Iranian oil can continue the trade without risk of sanctions until they reach the negotiated cap”, a senior U.S. official said.
What? Not again. U.S. oil producers are still threatened from the last market selloff that started last October when President Trump granted waivers to Iran’s biggest buyers. This report had them saying, here we go again. The last time President Trump granted waivers to Iranian oil buyers it caused one of the biggest selloffs in oil history, and traders and producers still have that etched in their minds.
The article talks about a “negotiated cap” that no one knows about. The Journal says that “Japan, South Korea, Turkey, Taiwan, Italy and Greece were the other countries granted waivers last November.” The level of the caps for each country wasn’t made public. Is it one million barrels, it 12 million? A billion? No one knows.
Why now? After the Trump Administration blasted Iran and pledged no waivers, they are having a change of heart. The Journal says that “The move could also represent a small gesture toward Iran at a time when Iranian officials have rebuffed President Trump’s calls for them to reach out and start fresh talks with him on Tehran’s nuclear program.”
So, if that was not enough to move oil prices, how about more tariffs on Mexico. I know what you are thinking. Didn’t we just get a new trade deal with Mexico? Yes, but these tariffs are about immigration not trade. What? Yes, Immigration.
President Donald Trump tweeted that ”On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied.” How it will be determined that the situation will be remedied is to be determined but it might be cheaper for Mexico to build a wall and pay for it.
Of course, it adds a new level of uncertainty to global trade wars. China is using this tweet as saying that the U.S. can’t be trusted in a trade war. So, I guess that China will have to go back to getting technology and intellectual property the old way, steal it. Global markets do not like it as they go deep into risk aversion mode. That is hurting oil again as they fear the trade war will kill demand.
Yet, there is bullish news on the OPEC front. Not only is Saudi Arabia threatening to respond to Iranian attacks on their oil tankers, OPEC production is falling. Reuters reported that “In May, the 11 OPEC members bound by the agreement achieved 96 percent of pledged cuts, the survey found, compared to 132 percent in April, due to the rise in production in Saudi Arabia, and increases in Iraq and Angola. But a drop-in supply in two of the exempt producers more than offset these gains, the survey found. Iran posted OPEC’s biggest supply drop this month of 400,000 bpd.”
The Financial Times reported that “Saudi Arabia has called for a decisive Arab stand against Iranian threats as King Salman convened a meeting of Arab states that condemned the Islamic republic’s alleged interference in the Arab world. The King, addressing an emergency Arab summit in Mecca on Friday, said Riyadh wanted to avoid war and was willing to extend its hand for peace, even as he attacked what he described as Iran’s perpetuation of terrorism in the region directly and via proxies. “Iran has been supporting terrorism for decades and threatening security and stability with the objective of expanding influence and domination, a matter rejected by international norms and conventions,” he said in comments carried by Kuwait’s state news agency.
He urged Gulf Co-operation Council states to work together to maintain security in the wake of what he called “criminal” attacks against four oil tankers off the United Arab Emirates coast and oil pumping stations in Saudi Arabia earlier this month, according to the FT.
Get some “Freedom Gas.” Even as global natural gas prices are under pressure, the long-term outlook for natural gas and its exportable form liquified natural gas “LNG” has never looked better. Press release from the United States Department of Energy (DoE) has named the country’s natural gas: “Freedom gas.” The statement was announcing the DoE’s increase of gas exports produced by a Freeport LNG terminal off the coast of Texas. “Increasing export capacity from the Freeport LNG project is critical to spreading freedom gas throughout the world by giving America’s allies a diverse and affordable source of clean energy,” Mark W Menezes, the U.S. undersecretary of energy, said.
Because of fracking, the U.S. is now the biggest producer of natural gas and because of that we are less vulnerable to other producers that have threatened to cut off our supply in the past. The Term “freedom gas” is also a tweak to Russia that has used its natural gas monopoly in Europe as a tool to pressures former Soviet satellite states into submission. It is also a message to Germany that seems to want to stay reliant on Russia, even though they have proven that they are less than a reliable supplier.
The Trump administration has threatened to sanction the new Nord Stream 2 pipeline, a joint project between Germany and Russia. It is a 746-mile pipeline from wells near St. Petersburg to Greifswald in northeastern Germany and would run under the Baltic Sea. Germany could double the amount of natural gas it imports from Russia, which already supplies 40% of the country’s gas consumption.
The Trump administration is mystified that Germany wants to be reliant on Russia for natural gas supply when they have cut off supplies for political reasons in the past. As U.S. exports rise, Russian dominance in natural gas will be lessened. Still we got a bearish EIA report. The EIA reported that working gas in storage was 1,867 Bcf as of Friday, May 24, 2019, according to EIA estimates. This represents a net increase of 114 Bcf from the previous week. Stocks are 156 Bcf higher than last year currently and 257 Bcf below the five-year average of 2,124 Bcf. At 1,867 Bcf, total working gas is within the five-year historical range. In other words, yes, natural gas can still go lower!
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network