The Energy Report for Monday, August 12, 2019

Monday Blues

Crude oil gave in to the Monday blues after holding steady most of the night before going south. The move followed a tanking U.S. stock market that seems to be worried that a U.S.-China trade deal won’t get done. President Trump said he was not ready to make a deal with China and suggested that the scheduled September talks could be cancelled. Of course, China has other things on their mind as protests in Hong Kong turn increasingly violent.

The Chinese government cancelled flights as protestors stormed the airport. China’s President Xi Jinping is having a harder time keeping things together as his hardline policies on trade and Hong Kong are actually making him look ineffective and weak. Trump’s threat to cancel negotiations came after the International Monetary Fund on Friday warned of downside risks to the Chinese economy if trade tensions escalate.

In the meantime, U.S. oil producers continue to pull back as they struggle to make a profit with costs rising and oil prices stagnate. Baker Hughes reported on Friday that the U.S. oil rig count fell for the 6th week in a row by 6 rigs. That brings the U.S. rig count down to 764 last week, and that is down by 124 rigs or 14% since the high in Nov 2018.

Reuters reported that Pioneer Natural Resources (PXD.N), one of the largest U.S. independent oil producers, on Wednesday warned that the shale boom could end by 2025 in all but one area of the Permian Basin, the country’s largest shale field, as oil prices remain low and many producers pull back on drilling. Baker Hughes reported that the number of active gas rigs fell by 2 to reach 169. This means that the trends in the oil patch is for less oil production. That may matter, assuming rate cuts kick in and the global stock markets are steady.

Bloomberg News reports that OPEC will be watching the Energy Information Administration’s shale output forecasts with bated breath today. With production showing no signs of a letup, even after drillers cut more than 100 rigs this year, continued expansion would only heighten the need for more action from the cartel and its allies. Bernstein said an extra 1.0 million barrels a day of output cuts in 2020 would help defend prices at $60.00 a barrel.

The Wall Street Journal reports that Saudi Aramco is buying a 20% stake, worth some $15 billion including debt, in India’s Reliance Industries oil and chemical business, a move that would help match its enormous crude production with refining capacity, as it gears back up for a planned initial public offering. The move would represent one of Aramco’s biggest forays overseas and comes as it is trying to win over potential global investors for a possible listing that is now back on the front burner among Aramco executives and Saudi government officials. Aramco and Reliance Chairman Mukesh Ambani said the transaction was still subject to due diligence and a definitive agreement. The deal values Reliance’s energy business at $75 billion, including debt, they said.

The Wall Street Journal also reported that Saudi Aramco said net earnings for the first half of 2019 were $46.9 billion, down just over 11% from $53 billion in the year-earlier period, due to lower oil prices. The company, owned by the kingdom of Saudi Arabia, is conducting its first ever earnings call later Monday. The process is aimed at boosting transparency among potential investors ahead of its planned IPO. The listing, a key pillar of the company’s economic diversity drive, has languished amid questions over valuation and the venue for any IPO. Recently though, planning has revved back up again. The Wall Street Journal reported Friday that Aramco was speeding up the timing for a potential listing to as early as next year.

The recent weakness in crude oil should set the stage for some good long-term buys. In the short run, volatility can have you playing both sides. Get updates on trades.

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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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