Latest Market Commentary

June 19, 2018

President Trump has threatened to add additional tariffs to China. Investors are concerned that these actions could lead to a trade war between China and the United States, the world's two largest economies. The equity markets are set to open lower as traders concerns grow with respect to an impending trade war. All of these barbs between China and the U.S. could just all be negotiations, but if these action continue at some point it could impact consumer and business outlooks. 

Energy consultant firm Wood Mackenzie made the remark that the U.S. would find it hard to find an alternative market that is as big as China considering China takes around 20% of all U.S. crude exports. 

The chatter overnight on the trade war topics has caused oil prices to be trading lower this morning. This news, along with the looming Organization of Petroleum Exporting Countries (OPEC) meeting, which the market expects will result in some agreement to add more production is pressuring energy prices currently. OPEC and non-OPEC are trying to temper the market's reaction as the reports all say this will be a "gradual" increase. 

The U.S. Energy Information Association monthly drilling productivity report expects that crude oil production from seven major shale basins to increase by 141,000 barrels per day (bpd) from June to July to a record 7.34 million bpd. The shale producers continue to pump out crude oil. 

In Libya, 2 of the major oil ports were closed last week and evacuated due to attacks causing a loss in exports of 240,000 bpd. The market has seen Libya and Venezuela's production and export fall and this is a factor that has supported prices and one of the reason OPEC feels they may need to increase output to make up for these shortfalls. OPEC claims they want stable market so keeping production up in a market that has seen very good demand would help that goal. The thought has been that oil prices in the 60 to 85 dollar range would be good for all. 

Canadian oil producers are increasing their exports to the U.S. Gulf Coast, with the majority being shipped on rail cars to make up for declining Venezuelan supply. Crude exports to the U.S. Gulf Coast are currently around 530,000 bpd up from 443,000 bpd in March and 336,000 bpd in January 2017. About 38,000 bpd of Canadian crude was moved by rail to the U.S. Gulf Coast in March. However, there are report of two additional 60,000 bpd unit trains now being loaded in Western Canada. 

There are many different viewpoints on the upcoming OPEC meeting. JBC Energy said a formal deal to increase crude output looks unlikely. It's speculated that OPEC and non-OPEC producers that have been voluntarily over compliant with output cuts will increase their production and argue for reaching compliance on an annual basis. Societe Generale expects Saudi Arabia, the United Arab Emirates and Kuwait to increase its output by a combined 500,000 bpd beginning in July during the June 22 OPEC meeting. It also expects Russia to increase its production gradually by 200,000 bpd in two to three months. It said the focus will be on replacing Venezuelan losses, not offsetting the impact of Iranian sanctions. 

Early estimates are calling the American Petroleum Institute to show draw in inventory again later today when they release their inventory update. Gas demand was a very strong last week and this trend should continue.


Tim Danze, MFA Oil Company Hedging Manager