OilPrice Intelligence Report: Oil Rebounds Despite Trade War Fears

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Oil prices rebounded on Friday having fallen the day before due to growing tensions between the Trump administration and China regarding tariffs and the increasing likelihood of a trade war.

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Friday, March 23, 2018

Oil prices fell sharply on Thursday on news of $60 billion worth of tariffs on China. China followed up on Friday with an initial announcement of $3 billion worth of tariffs on U.S. pork, fruit and recycled aluminum and steel pipes. Wall Street fell sharply over fears of a brewing trade war. That dragged down oil prices, although benchmark prices rebounded in early trading on Friday.

Oil jumps on Saudi comments. Oil prices rose by 1 percent on Friday morning after Saudi Arabia said that the OPEC production curbs could be extended into 2019. “We still have some time to go before we bring inventories down to the level we consider normal,” Saudi oil minister Khalid al-Falih told Reuters. “We will hopefully by year-end identify the mechanism by which we will work in 2019.”

Trump installs ‘hawkish’ John Bolton. President Trump tapped former U.S. Ambassador to the UN, John Bolton to replace H.R. McMaster as National Security Adviser. The reshuffling is widely seen as a major shift towards a hawkish foreign policy, raising the odds of conflict with Iran and North Korea, in particular. As the year wears on, U.S. confrontation with those two countries could be incredibly bullish for oil.

Trump launches $60 billion in tariffs. The Trump administration announced plans for a variety of tariffs targeting an estimated $60 billion worth of Chinese goods. The move was met with a stock market selloff, which also dragged down crude oil. The risk of a trade war is rising sharply, as China has vowed retaliation. The IMF, along with a long line of economists, governments and business groups, have warned that protectionism poses a grave risk to the global economy. Meanwhile, the Trump administration exempted a series of parties from the previously announced steel and aluminum tariffs, including the EU, Argentina, Australia, Brazil, South Korea, Mexico and Canada.

Shale drillers looking at Meramec in STACK. The Meramec formation held within the STACK play in Oklahoma is seeing a surge of interest from shale drillers, according to Reuters. Top shale companies like Devon Energy (NYSE: DVN) and Marathon Oil (NYSE: MRO) scooped up acreage during the market downturn several years ago, and production is now coming online. Devon says its output in STACK will jump to 140,000 barrels of oil equivalent per day (Boe/d) by the end of the year, up from 107,000 Boe/d in early 2017. Most of Devon’s spending in STACK will be directed at the Meramec formation. The bottom line is that shale companies are looking at the Meramec because of low breakeven prices, combined with the fact that Permian land prices are already sky-high, which has forced many in the industry to look elsewhere.

OPEC looking at new metric to measure oil market. OPEC said that oil inventories in the OECD are only 44 million barrels above the five-year average, which suggests the oil market is getting close to “re-balancing.” However, OPEC officials have recently commented that the measurement might not accurately portray the state of play in the oil market, and the group is looking at other metrics. Some ideas include non-OECD inventories, floating storage, and days of coverage, although nothing has been decided.

Chevron acknowledges climate change, denies role. In a potentially significant court case in California, Chevron (NYSE: CVX) acknowledged the reality of climate change and the role of humans in causing it, although Chevron said the case against it should be dismissed. The case brought by the cities of San Francisco and Oakland allege that Chevron and its peers should pay damages for the responses the municipalities have to take to respond to flooding caused by climate change. Chevron argued that “billions” of parties share responsibility. The case is viewed as a bellwether in terms of the potential litigation risks for oil companies related to climate change.

Gulf of Mexico sale flops. The U.S. held the largest offshore oil auction in its history this week, but it was met with only tepid interest from the oil and gas industry. Although an estimated 77 million acres were offered, companies only successfully bid on 1 percent of them. The Interior Department had hoped that the large offering, combined with lower royalty rates for shallow water, would entice drillers. But the poor showing suggests that many in the oil industry are cautious when it comes to offshore drilling, and are likely focusing on other areas – such as Latin America – as well as on onshore shale.

China crude futures launching Monday. China is set to launch an oil futures contract on Monday, an effort that is several years in the making. The Shanghai Crude future is hoping to rival WTI and Brent as a market for oil, but it will lack liquidity, at least in the beginning. Yuan-denominated oil contracts will also have some rules that are unfamiliar to western traders. It is unclear how the new oil futures contract will fare, but it is part of China’s effort at gaining more influence over how oil is traded, as well as a way to boost the standing of its currency.

Biofuels feud drives down RIN prices. Oil refiners have been battling with the Corn Belt over the requirement to blend ethanol into their fuels. The Trump administration has been caught in the middle, but the feud has already succeeded in driving down the prices of Renewable Identification Numbers (RINs), the credits refiners can purchase in lieu of using ethanol. RIN prices are down by half since October, granting a windfall to oil refiners.

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