Oil Trifecta

Forget that darn polar vortex, for oil traders it is going to be a jammed packed day. Not only do you have the weekly Energy Information Administration (EIA) reports, you also get the decision by the Federal Reserve Open Market Committee on interest rates, as well as the kick off to the U.S. China trade talks. If you want to trade the news this is it! 

Oh, sure the reading on my car thermometer read a -22 below zero, but the cold is just a footnote in a day that could really answer a lot of the questions that oil traders have been pondering.

Perhaps the main issue as far as oil demand expectations will be the outcome of the U.S. China trade talks. Businesses across America have been complaining about the trade war, but it really is China that is feeling the pain. The Trump administration is in a strong barging position because of recent weak economic data out of China and have a great chance to lay the groundwork for a good deal and structural changes between the two trading partners. Any good news out of the meeting could easily add a buck or two to oil.

Inventories also will be in play as the EIA releases its version of the supply and demand data. One area that will be scrutinized will be distillates as this is where supplies are below normal and will feel the most impact from the Venezuelan sanctions.

Despite the muted reaction to the sanction announcement, we saw the ultra-low Sulfur diesel contract lead the entire energy complex higher yesterday. Three major refiners must look for alternatives for Venezuelan heavy crude so that will keep Brent and WTI oil supported on breaks.

The American Petroleum Institute (API) version of the world was supportive of the market. They reported that U.S. crude supply increased by a less than expected 2.098 million barrels. The crude number looked more bullish because of a 682,000 drop in the Cushing Oklahoma delivery point. US distillate stocks only saw a 211,000-barrel increase. With record-breaking cold we should see the Venezuelan oil starved distillate supply side falls even more next week.

Then you have the Fed! We all know that the Fed won’t increase interest rates, but we want to see if they can craft a dovish statement. One of the market’s biggest concerns is how the Fed plans to signal the winddown of its hefty balance sheet. The market freaked during fed chair Jerome Powell’s last Fed meeting press conference when he suggested that the winddown was on automatic pilot. He later backed off that statement easing the market’s concerns. Now he must craft a message that the balance sheet winddown is data dependent. If he does that and does not flub in the press conference, oil should rally post Fed.

Venezuela is not the only oil hot spot. Yesterday, oil was also supported on more turmoil in Libya. Reuters reported that Libya’s biggest oilfield, El Sharara, will remain shut until an armed group occupying the site leaves, the head of National Oil Corp (NOC) said on Tuesday, more than a month after the field closed because of a protest. “The armed group attempting to hold NOC and Libya’s economic recovery to ransom must leave the field before NOC will consider restarting production,” NOC Chairman Mustafa Sanalla told a Chatham House conference in London. The field was producing as much as 315,000 barrels per day (bpd) ahead of its closure, but it has lost 13,000 bpd of capacity since last month due to security breaches, Sanalla told reporters on the sidelines of the event.

Natural gas can look beyond the cold because, after the big chill, we get a big thaw. In Chicago, we have a windchill factor of 49 below zero but are projected to go back up to a regular temperature of 40 degrees above zero by Saturday and 45 on Sunday. With a 100-degree swing from the windchill low, I think I may wear shorts on Sunday. So, in other words the record demand that we will see today for natural gas will all but disappear by the weekend