Truce
A trade truce with China and a sham election in Venezuela is a strong indication that we will continue a path of strong demand and tighter supply in the global oil market. I am not trying to be so simplistic but if the U.S. continues to trade and negotiate with China, both economies will benefit in increasing demand expectations. In Venezuela, the election of Nicolas Maduro who allegedly won a new 6-year term as president will cause a total collapse of the Venezuelan oil industry leaving a void of heavy crude oil that will be almost impossible to fill. This comes as the princess of petroleum Trilby Lundberg reports that the national average for gasoline has hit $3.00 a gallon. The super-cycle in oil is on and the trade is starting to get it.
Many markets are reacting to the news that trade sanctions against China and rotatory sanctions against the U.S. are put on hold. We saw grain markets react positively with gap openings on soybeans, corn and cotton. Still, some of the buying may be associated with the massive amounts of rain we have seen through a lot of the grain belt that could delay already delayed planting even more. Market Watch Reported that Treasury Secretary Steven Mnuchin said Sunday that the Trump administration would “put the trade war on hold,” and delay tariffs on Chinese imports to the U.S., while the two countries hammer out details of a deal to reduce the trade deficit with China. There has been some side talk that China is looking to give in on some issues and in the meantime grain traders are jumping in. Market Watch said that at the end of trade negotiations this weekend, China agreed to buy larger amounts of U.S. goods to help narrow the deficit but did not agree to the specific U.S. target of $200 billion. China is estimated to have a $375 billion annual trade surplus with the U.S.
U.S. rig operators stalled out last week as logistical problems may be slowing the rig count’s meteoric rise. After 6 weeks of increases, the total oil rig count according to Reuters held at 844 in the week to May 18, General Electric's (NYSE:GE) Baker Hughes energy services firm said in its closely followed report on Friday. More than half the total of oil rigs are in Permian basin in west Texas and eastern New Mexico, the nation’s biggest shale oil field. Active units there increased by four this week to 467, the most since January 2015.
$3 a gallon is here! Trilby Lundberg says that the weighted national average price at the pump is now $3.00 gal., up 10 cents since May 4. It's been thirteen straight weeks of hikes totaling nearly 41 cents, and the price sits 59 cents above its year ago point. Retail diesel fuel jumped nine cents in the past two weeks and the consumer price premium over one year ago is even greater than for gasoline, 68 cents. Crude oil led the climb. In the case of gasoline, the wholesale price paid by marketers and dealers leaped more than oil did, as refiners passed through the rest of the seasonal cost increases of Summer reformulation for federal compliance, and refiners likely took some much-needed gasoline margin as well. Refiners are still recovering from low gasoline margin during December-March, and retailers are still struggling with extra-thin gasoline margin. We find several retail markets with margins in the red in the Lundberg May 18 data, especially in the Gulf Coast region – and even West Coast margins, with comparatively fat gasoline margins, are too narrow to be sustained due to punitively high taxes and business costs. Nationally a few more pennies at the pump can be expected due to needed retail margin relief alone, even if crude oil prices cease climbing. It is not an easy time for the U.S. downstream to achieve healthy gasoline margins because demand growth is quite meek accordion to the princess.
We continue to see short term and longer term issues with supply. Prices have to stay high to encourage investment to meet demand. Shale operators can’t do it all and they certainly can’t replace Venezuela heavy crude. Diesel fuel will remain tight and so will jet fuel. Stay hedged for the coming months.