Energy Prospectus

Oil prices held onto the modest gains following the OPEC+ deal at the start of this week. The next move for crude benchmarks likely depends on the outcome of the U.S.-China trade negotiations, which appear to be moving in the right direction after the U.S. agreed to delay China tariffs.

U.S. to delay China tariffs. At the time of this writing, press reports indicated that the U.S. and China were still haggling over phase one of the trade deal, but were close enough to warrant a delay in the scheduled December 15 tariff hike. The Trump administration is insisting on hefty purchases of American farm goods from China, but Beijing is balking at the volumes demanded.

OPEC+ reactions are mixed. The reaction from oil market watchers to the OPEC+ deal was mixed, ranging from bullish to indifference. Bank of America said Brent could hit $70 this year, while Raymond James was more bullish on 2021, seeing Brent averaging $80. Others noted that the OPEC+ deal may not be all that significant since the cartel was already over-complying.

China imports record level of oil. China imported 11.13 mb/d in November, a record high. But some of that oil could be the result of stockpiling. “Crude oil imports in the first eleven months combined totaled a good 10 million barrels per day, which puts them 10.4% up on the previous year,” Commerzbank said in a note.

Saudi deficit balloons. Saudi Arabia said that its budget deficit will rise to $50 billion next year due to low oil prices and production cuts. That will be $15 billion larger than this year. The Saudi budget requires oil prices in the mid-$80s for it to break even.

The Phil Flynn Energy Report: 12-10-2019
By Phil Flynn (Dec 10, 2019 10:05AM ET)

Greatly Exaggerated
Once again the death of Chinese oil demand has been greatly exaggerated. Oil prices paused on U.S.-China trade concerns as well as potential interest rate direction from the Federal Reserve that meets on Wednesday. Yet one must wonder how tight the global oil markets might get if there is indeed a U.S.-China trade deal because already Chinese oil demand is shattering records.

Reuters reports that the growth rate of Chinese crude oil imports reached a record 11.13 million barrels per day in November and are up 10.5% for the first 11 months of the year compared to the same period last year, customs data showed on Monday. This flies in the face of the bearish arguments that we had heard that the U.S.-China trade war would destroy Chinese oil demand. What is more is the fact that the OPEC plus alliance is committed to keeping global oil supply restrained leaving the global oil demand cover the tightest it has been in years.

The pressure on China to make a deal should be rising especially if you look at their Consumer Inflation Data released last night. MarketWatch reported that, “China's consumer inflation accelerated further in November to its highest level in nearly eight years, driven by soaring prices of pork and other food items. The consumer-price index rose 4.5% in November from a year earlier, matching a pace recorded in January 2012, data from the National Bureau of Statistics showed Tuesday. The key inflation reading was higher than a 3.8% rise in October and beat a median forecast of a 4.4% increase by economists in a Wall Street Journal poll.

China’s food prices in October grew 19.1% from a year earlier, the fastest pace in more than 11 years, after climbing 15.5% in October. Pork prices soared 110.2% a year in November, breaking the record made in October as an outbreak of African swine fever continued to cut the hog population and drive pork prices higher. Pork prices alone lifted headline CPI by 2.64 percentage points in November. Meanwhile, the increase in China pork prices on a monthly basis eased to 3.8% in November, down 16.3 percentage points from a month earlier. Prices for other meat consumed as pork alternatives rose between 11.8% to 25.7% on year in November, the statistics bureau said.

In addition to that or perhaps because of it, China is making good on some Phase one grain purchases. Soybeans moved higher after Reuters reported that Chinese soy importers on Monday bought at least five bulk cargo shipments of U.S. soybeans, or about 300,000 tonnes, for shipment in January and February after Beijing offered the buyers at least 1 million tonnes in new tariff waivers, U.S. exporters said. The fresh allotment of tariff waivers, which exempts importers from 30% tariffs on U.S. shipments, comes after buyers used up nearly all of the 10 million tonnes in waivers awarded by Beijing in October, the traders said. On top of that, we get the December WASDE report, and so far the market is not expecting any major changes from the last report. So stay tuned.

In crude oil, we get the American Petroleum Institute (API) report tonight. Private forecasters are seeing supplies continuing to slip at the Cushing, Oklahoma delivery point, and there are growing expectations for a crude oil draw. < API reported a small build in U.S. crude oil inventories after hours.

MY TAKE is that WTI will trade in tight range from $57 to $59 while waiting on Phase One Agreement in the U.S. vs China Trade War. If nothing is signed before Christmas, we could see WTI test support levels, but $56 now appears to be very strong support.