Potential US tariffs on the EU, the UK, France, Germany and Spain to the tune of $3.1 billion, along with rising cases of the coronavirus, is putting more uncertainty in the economic recovery and the demand growth for oil. Better buy that Louis Vuitton bag or some fancy olives, because President Trump, in retaliation from a ruling from the World Trade Organization Airline protectionism, is not happy.
The trade sport is not helping oil, because part of the story behind the biggest comeback in oil history has been the fast recovery from a total collapse in global oil demand. Fears that a trade war could slow that improvement is making markets nervous even though the Trump administration is leaving some time to negotiate a trade truce.
The oil market was already showing some signs of topping out after surging to more than $41.00 a barrel. The American Petroleum Institute (API) report showed a 1.7 million barrel drop in weekly crude supply. Still another 325,000 barrel drop in Cushing, Oklahoma crude supply along with a 3.9 million barrel drop in gasoline supply and a 2.6 million barrel drop in distillate supplies suggest that U.S. demand is on the mend. Some are worried that weak refining margins may halt the rise in crude, but if the market stays strong, rising oil product prices should lift all boats. Or oil prices anyway.
More signs that OPEC cheaters are toeing the line should add some support. Nigeria reportedly is s raising its official selling prices (OSPs) for July. That means that they are getting in front. This comes with more signs that the physical market in Europe in tight with buyers of oil left scrambling.
We are also going to see the US oil production struggle despite talk of some shale wells coming back online. Offshore oil production is in big trouble as well. Reuters reports that:
“The companies that operate offshore drilling rigs for major oil producers face a second wave of bankruptcies in four years amid a historic drop in energy collapse of the offshore industry will have a broad impact. Drillers and their suppliers have driven innovation that has helped shale and offshore wind companies by pioneering remote monitoring and control, and last year directly generated about 25% of global oil production."
Reuters adds:
“The offshore services business is the worst performing of the oilfield services sector, with shares of the ten largest publicly traded down 77% since the start of the year."
Zero Hedge reports that, “The World Trade Organization (WTO) outlines, in a new report, that “rapid government responses helped temper the contraction” in the world trade and likely thwarted the worst-case scenario projected in April." The WTO is referring to massive fiscal stimulus deployed by governments, and the balance sheet of the G-6 central banks that has exploded, with the Fed’s total asset expected to double in 2020 amid an avalanche of money printing that has helped arrest the collapse in world trade.” Do you think?
The oil market is still on a path to tightening but we may see a bit of a correction. And that may be a bit healthy too. As far as the fears of a second wave of coronavirus are concerned, based on what we hear from Dr. Fauci and other experts, they are overblown. The trend is still falling output and rising demand, and that is always long term bullish.