China Wants More Talks

On Friday U.S.-China trade hopes were high but now they are falling apart. Trump sent oil markets and stock markets flying late Friday when he announced that China and the United States had reached a tentative agreement for the "first phase" of a trade deal, with China agreeing to buy up to $50 billion in American farm products and would accept more American financial services in their marketplace. Yet now only 2 days later, China seems to be backing down. Reports overnight that China wants more talks before signing Trump’s Phase 1 trade deal is sucking the optimism out of what was put back into the market on Friday. Once again it seems like China makes an agreement and then pulls back causing more uncertainty for the global economy.

For the oil market, the announcement had a major impact on prices. After opening up higher in the night session the market eased off on concerns that China’s government had not confirmed that a deal was made. Then around 4.15 am central time, reports that China wanted more talks sent the market into a tailspin. Now we have to await the White House response to China’s pullback. What will be the tweet and will the next tweet be a further breakdown of talks and will Trump tweet that the sanctions that were delayed will be put back on.

Crude oil also saw support on reports the Iranian oil tanker had been hit. At first, the blame was placed on Saudi Arabia because the tanker was near a Saudi port. Now they are not so sure. Reuters reported that "an Iranian government spokesman on Saturday described as a “cowardly attack” an incident that Iranian media have called the apparent targeting by missiles of an Iranian-owned oil tanker and said Iran would respond after the facts had been studied.”

At the same time, there are reports that Saudi Arabia is in peace talks with Yemen’s Houthis rebels. The Iranian backed rebels are the ones the Iranians blamed for the September attack on Saudi oil facilities. 

This comes at a time when the U.S. refinery system is at a very high level of maintenance. Last week refinery runs were all the way down to 85.7% of capacity. This is causing speculation that we will see a supply increase in crude. We are looking for a 2-million-barrel increase in crude supply and a 2.0 million barrel drop in gasoline supply and a 3.0 million barrel drop in distillates. Despite the market’s focus on China, we are looking at a very tight distillate market that is likely to get tighter.

Natural gas is a different story. The market could be headed towards a glut unless old man winter takes over. Andrew Weisman at EBW Analytics Group reports that "natural gas continued to sink last week, with the November contract testing support as low as $2.187/MMBtu intra-day on Friday and prices in the day-ahead market at Henry Hub plummeting to $2.075—the lowest level since early August. Late in the week, though, there were signs that gas prices might be bottoming out. On Sunday, the latest run of the European weather model shifted cooler. If this trend is confirmed Monday morning, gas prices could start to move up. A major decline in electricity loads slashed power sector demand for natural gas 3.1 Bcf/d last week, a further decline may yield another 2.5 Bcf/d of losses in power sector gas demand this week.”