Saturday, March 24, 2018 /6:33 AM /Oilprice.com
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 suggest 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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