Market Report & Analysis for 1/30/2019 Morning Edition
Morning Market Overview
Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled at multi-week lows on poor corporate earnings reports showing the economic slowdown in China is spreading to U.S.-based firms, heightening anxiety over the global economy a week after the International Monetary Fund revised lower for a second time its growth outlook for the world economy while China reported the weakest economic expansion in 2018 since 1990.
Oil futures were also under pressure on news the Trump administration is considering releasing oil from the Strategic Petroleum Reserve that would be timed to offset the effect of sanctions on Venezuelan oil sales. The news comes days after the United States recognized Juan Guiado, the president of Venezuela’s National Assembly, as Venezuela’s legitimate leader, and said Nicolas Maduro must go. Maduro was sworn into a second six-year term as Venezuela’s president earlier this month following what has been described as fraudulent elections a year ago. Venezuela is the third largest exporter of crude to the United States, averaging a little more than 500,000 bpd in 2018. U.S. Gulf Coast refiners rely on Venezuela’s heavy blend, with the global medium and heavy crude market tight.
That tightness is due to an unrelenting decline in Venezuelan crude production under years of mismanagement, a falloff in Mexico’s output, while oil sales from Iran have been reduced due to U.S. sanctions. Much of Canada’s heavy oil is locked up north of the border because of limited pipeline capacity. U.S. tariffs on a string of Chinese imports are seen to have hit an already vulnerable and overleveraged Chinese economy where consumer spending has also fallen off.
Beijing’s response to counter with tariffs on U.S. imports, and a retreat from globalization in general lamented at the World Economic Forum in Davos, Switzerland, last week, have slowed world trade and damaged export-driven economies such as China and Germany. So far, the major arbiters in projecting global oil demand—the Energy Information Administration, International Energy Agency, and the Organization of the Petroleum Exporting Countries—have largely left their expectations intact, although offered caution over a potential quickening pace in the world economic slowdown. IEA continues to expect year-on-year growth in global oil demand at 1.4 million bpd, a faster pace than the 1.3 million bpd annualized growth rate for 2018. World oil demand in the first quarter is weakest, with IEA projecting demand in the current quarter down 1.0 million bpd from the fourth quarter 2018 to 99.2 million bpd, while seen averaging 100.6 million bpd in 2019.
All bets are off, so to speak, if the United States and China fail to reach some type of an accord bridging their differences over trade, and instead escalate their trade dispute. They have until March 1 to reach such an agreement before a 90-day truce expires, or risk an escalation in their trade dispute that could steer the world economy into a ditch. Vice ministers with China’s government are in Washington, D.C. this week to meet with their U.S. counterparts, with the two sides set to meet Wednesday and Thursday (1/30-31).
