The Energy Report 10/30/18

Currency Manipulator


Oil prices continue their slide on fears that the U.S. China Trade War will continue and derail economic and oil demand growth. The Wall Street Journal reported that China guided the yuan to its weakest official level in a decade on Tuesday—a move that could fuel expectations of a further, self-reinforcing slide. TheWSJ says that the yuan’s depreciation puts pressure on Chinese policy makers, who want to give investors a bigger say in determining the currency’s value but appear uncomfortable with letting the yuan fall beyond a symbolic seven to the dollar. The recent slide has reignited speculation about whether further weakness could spark capital flight, which would in turn exacerbate the currency’s swoon. The central bank set the dollar’s reference rate at 6.9574 yuan, putting the Chinese currency at its weakest since May 2008. The yuan slid to a decade low once mainland trading started 15 minutes later, with one dollar buying as many as 6.9724 yuan, according to Wind. This devaluing of the currency to try to boost Chinese exports may draw the ire of President Trump.


This move comes as the stock market got rattled on a report that the Trump Administration was preparing new tariffs on China. Bloomberg News reported that the tariffs would hit all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the trade war, three people familiar with the matter said. Yet, markets bounce back after an exclusive interview with FOX News channel’s  Laura Ingraham, where he said that he thinks there will be “a great deal” with China on trade but did suggest that if they do not get a deal more sanctions are possible. After those comments, the market came back but is still infused with nervousness and fear.


That fear is weighing on oil even as stocks tried to make a recovery. The market went from fears of shortages to fears of oversupply in just a few weeks and the truth is probably somewhere in the middle. Despite all the negativity on future oil demand and the possibility that oil supply will rise this week, the increase in supply will stop shortly. We will, within a few weeks, go back to drawdown mode and those draws will  be very large. We had better hope that demand slows because despite the recent sell off demand has failed to fall. If we get a cold start to winter, we will be scrambling to secure enough barrels. The Shale producers will do their part, but they won’t be a lot of help with heavy distillates. While we may see a glut of gas, jet fuel and heating fuel will be tight. Users need to be hedged.


The EIA has already warned that the average U.S. household expenditures for most major home heating fuels will be higher this winter compared with last winter. Average increases vary by fuel; natural gas expenditures are forecast to rise by 5%, home heating oil by 20%, and electricity by 3%, while propane expenditures are forecast to remain the same as last year. Most of the increases reflects higher forecast energy prices. U.S. average heating degree days are expected to be 1% higher than last winter. However, realized expenditures are highly dependent on actual weather. It should also be, since distillate supplies are 4% below average while demand is 7% above average and, on the fact, that natural  gas inventories  are at the lowest levels for this time of year since 2005. Inventories of distillate fuel and propane are also below the five-year (2013–17) average in several regions. Although inventory levels are low, EIA expects fuel supplies to be adequate to meet winter demand.


BP is setting the stage for big earnings from big oil. The Wall Street Journal reported that BO PLC BP saw its profit more than doubled in the third quarter, as strong crude prices put Big Oil on track to deliver record levels of cash this year. BP said its replacement cost profit—a number analogous to the net income that U.S. oil companies report—was $3.1 billion in the third quarter, compared with $1.4 billion in the same period a year earlier. Its underlying profits rose to $3.8 billion, a five-year high and roughly a third higher than analysts expected. BP shares were up about 4% in early trading in London.  Exxon Mobil Corp. , Chevron Corp. and Royal Dutch Shell PLC are all due to report results later this week.


Of course, the market is coming down to the perception about demand. If demand levels stay where they are and rise seasonally like they normally do, we will see the tightest oil market we have seen in decades. Without an additional release from the SPR, supplies will be tight as increased production by OPEC and Non-OPEC members will put spare oil production capacity historic lows. Or on the other side, if we see a significant counter seasonal drop in oil demand then we may see further weakness. While this time may be different, you have to remember that anytime in the last five-year oil sold off because of a prediction of a future drop in demand, it ended up reversing and coming right back. That is because the talk of demand destruction was and probably still is greatly exaggerated.


The oil market is also getting pressure on some thoughts that the U.S. is going to grant waivers to some buyers of Iranian oil. According to reports in a recent phone call South Korean Foreign Minister Kang Kyung-wha asked his U.S. counterpart, Secretary of State Mike Pompeo, to grant his country a waiver. This comes as other Iranian oil buyers are worried that if they can’t buy Iranian oil there will not be enough oil to buy. The U.S. has been trying to help them find alternatives.


Clean air! Thank the Frackers! The EIA reported that U.S. electric power sector carbon dioxide emissions (CO2) have declined 28% since 2005 because of slower electricity demand growth and changes in the mix of fuels used to generate electricity. EIA has calculated that CO2 emissions from the electric were sector totaled 1,744 million metric tons (MMmt) in 2017, the lowest level since 1987. In the United States, most of the changes in energy-related CO2 emissions have been in the power sector. Since 2005, as power sector CO2 emissions fell by 28%, CO2 emissions from all other energy sectors fell by only 5%. Slower electricity demand growth and changes in the electricity generation mix have played nearly equal roles in reducing U.S. power sector CO2 emissions. U.S. electricity demand has decreased in 6 of the past 10 years, as industrial demand has declined, and residential and commercial demand has remained relatively flat. If electricity demand had continued to increase at the average rate from 1996 to 2005 (1.9% per year) instead of its actual average rate of -0.1% per year, U.S. power sector CO2 emissions in 2017 would have been about 654 MMmt more than actual 2017 levels. If the mix of fuels used to generate electricity had also stayed the same since 2005, U.S. power sector CO2 emissions would have been another 645 MMmt higher in 2017. The power sector has become less carbon intensive as natural gas-fired generation displaced coal-fired and petroleum-fired generation and as the non-carbon sources of electricity generation—especially renewables such as wind and solar—have grown. The substitution of natural gas for other fossil fuels has largely been market driven, as ample supplies of lower-priced natural gas and the relative ease of adding natural gas-fired capacity have allowed it to pick up share in electric power generation in many markets. In 2016, natural gas generation surpassed coal as the largest source of electricity generation. Which would have not been possible without the shale revolution!


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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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