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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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Is The Oil World In Panic Mode?

Oil markets have shown tremendous weakness in recent days, losing nearly seven dollars before rallying back a bit on Thursday.

What’s causing it? Market analysts have been struggling to find a single reason for it, preferring to cite a cocktail of negative news and rumor to explain the downdraft.

There have been reports of increased Saudi production to Asian customers, which many cite as a breaking of the dam of OPEC production guidelines – a break that would have many in the oil world in full panic mode.

But I don’t see these promises as a collapse inside the cartel. The Asian contracts are merely adding stability to the oil markets in front of the threats of renewed U.S. sanctions on Iran. It’s been made clear that the Iranians won’t stand for any production increases that are over and above the agreed upon increases at their Vienna meeting last month – and equally clear that the Saudis don’t want to put that production agreement in jeopardy either.

Many analysts are pointing to the reopening of Libyan oil ports to explain the quick drop in oil prices.

But I also don’t find this explanation very compelling either: Even with these newly cleared impasses, Libyan exports are only marginally increasing, and most experts believe that Libyan production will continue to slide downwards through the rest of 2018. Others have cited the threat of slowing oil demand from China, but these predictions of slowing Chinese growth are as frequent, and usually as wrong, as dandelions growing in an open field.

I am a student of the financial players and their influence into oil prices, and generally look at the movement of speculative money in and out of the futures markets. But even here there hasn’t been a discernible reason for oil’s latest drop. According to the COT reports, long positions have actually held fairly steadily through this latest 7 dollar downdraft in oil. Related: Independents Replace Big Oil In Southeast Asia

So – WHAT IS IT? Despite the varied answers that are appearing in the media for oil’s recent drop, I can find only one convincing reason that oil is recently acting poorly despite being one of the most fundamentally bullish oil markets I have seen in my 35 years trading it.

Trump’s trade war.

Commodities are different than stocks. They are time-sensitive instruments that regenerate and self-destruct every month. Current September commodity futures contracts don’t care where the markets will be in 6 months. They only care about their price prospects on the day they expire – the 28th of August. Because of this, they are far more sensitive to current threats than stocks and have been responding to the disastrous economic threat of a continuing trade war between the US and China (and our allies).

Corn is down. Soybeans are getting pummeled. Doctor Copper is giving us a nasty prognosis; Industrial metals like Zinc, Tin and Platinum are down anywhere from 15-35 percent.

Oil, for most of the run-up to US tariffs starting in late May, has strongly bucked this general commodity collapse – proving again just how fundamentally strong it is – but even that fundamental strength is no match for the destructive economic force of a global trade war. Related: The Permian Rush Is Creating A Frac Sand Shortage

It’s difficult to know what to say or do about this, if you’re an investor in commodity-reliant stocks. Heck, it’s tough if you’re an investor in anything, as the economic ill-effects of an expanding trade war will reach far beyond the commodity sector at some point.

Recently, there have been signs that Congress, and specifically the Republican party, are willing to break with the President on this self-destructive path towards ratcheting tariffs and reciprocal penalties. They’ve called on Treasury Secretary Mnuchin to answer questions about the legality and exit strategy of tariffs, and various Congressional leaders have been suggesting legislation to put a stop to it.

There has been a general belief that the Trump trade war will have to be abandoned at some point, as markets outside the commodity sphere begin to respond. When consumer prices begin to sharply increase, and jobs begin to be lost, most believe the President’s political needs will intersect with his self-destructive tariffs. But until that happens, it’s difficult to continue to recommend oil or other commodity stocks. It’s even more difficult to predict when the green light to buy them will return. Nothing has been as tough to forecast as the plans of President Trump’s administration.

By Daniel Dicker for Oilprice.com

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  • jonathan on July 22 2018 said:
    What’s causing it? Normal market action.

    The August CLQ contract was flirting with obnoxiously overbought, CoT just the same overbought. Something simply had to give.

    If anything just like the previous spike up above $70 earlier this year which was followed by the same violent move down, price action will continue to remain in a Bullish channel started back in 2017.

    fwiw blaming Trump could be slightly stretching things. Handing over that easy way out for any foot in the mouth analysts who chose to ignore glaring overbought signals before last weeks price action should be frowned upon.

    Dont wish the market was easier, wish you were better.
    Cheers!
  • Vishwas on July 22 2018 said:
    Dan Dicker, the author, seem commodity market player typically with short term views unlike a real financial analyst or an economist. Reason behind the fall is simply because fuel demand falling with increasing proliferation of electric commercial vehicles. The long term scene is bleak forcing each of OPEC member to grab max till the sun is shining. The rise was temporary due to Saudi manipulation trying for the IPO that is now more or less called off. Expect oil to eventually settle at $50-55 with the oil demand stabilizing at 60% to today's.
  • Robert on July 23 2018 said:
    Interesting angle on how trade war uniquely effects commodity contracts. Be careful about predicting the course of any war, however. A trade war has at least three phases (1) denial, which we are fast moving past, (2) disruption of existing trade arrangements, this is the negative, (3) evenly balanced and fair growth of trade, which is not intrinsically limited the way unbalanced trade is. Hopefully we can persevere. Lots of oil upside in #3.
  • Mamdouh G Salameh on July 23 2018 said:
    For oil, it is the quiet before the storm and the storm is neither about the threatening US sanctions against Iran nor the escalating trade war between the US and China. It is simply and purely about the petro-yuan.

    The 26th of March 2018 will go in history as the most momentous day for the United States’ economy, China’s economy and the petrodollar and also for China’s status as an economic superpower. In that day China launched its yuan-denominated crude oil futures in Shanghai thus challenging the petrodollar for dominance in the global oil market.

    In a research paper titled:”Will the Petro-yuan Be the Death Knell for the Petrodollar” published by the United States Association for Energy Economics (USAEE Paper No: 18-338, 17 April 2018), I argued forcefully and convincingly that the launching of the petro-yuan could mark the beginning of the end of the petrodollar. I also argued that the imposition of tariffs on Chinese goods could be the first shots in the petro-yuan/petrodollar war of attrition. This could escalate into a trade war between the two countries and a possible wider conflict between them.

    The US tariffs against China while adverse in nature are not going to threaten the global economy and global trade. China could easily sell the good it exports to the United States anywhere around the globe. Moreover, China’s thirst for oil will not be affected by the tariffs. China will continue to import oil in increasing quantities to keep its economy, which is the world’s largest based on purchasing power parity (PPP), functioning.

    The Tariffs are manifestations of the US deep worry about the petro-yuan undermining the petrodollar in a global oil market valued at $14 trillion and also undermining the US financial system.

    Today, the US financial system is the core of the global financial system. Because nearly everybody uses the US dollar to buy oil and to trade with one another, this creates a tremendous demand for US dollars around the planet.

    So if the US financial system is the core of the global financial system, then US debt is "the core of the core". US Treasury bonds fuel the print-borrow-spend cycle that the global economy depends upon. That is why a US default would cause interest rates to skyrocket and the entire global economic system to go haywire.

    Hitherto, the US dollar has had the monopoly over oil contracts as it enjoyed the status of the only currency in which major oil contracts could be made. This meant that US could get away by having a $21 trillion debt as it could print dollars backed by “black gold”.

    With the petro-yuan a reality now, China will, in effect, be making a claim to global oil reserves. That would definitely be against American interests as the “black gold” has been practically backing the US dollar as well as a humungous US debt.

    In its battle of wills with the United States, China has two trump cards. The first is its holdings of estimated $1,300 billion dollars of American debt which if offloaded to the market could lead to an immediate devaluation of the US dollar. The other is China’s strategic partnership with Russia. Russia and China share a strategic vision against the unipolar world: both see the United States in relative decline and the world already becoming multipolar. In the process of mismanaging its decline, the US suffers from a psychological problem that manifests itself in the unfounded fear of power challenge from potential rivals, hence its persistent attempts to hinder their rise. The world is changing and the world order must be revamped. Pax Americana is over and Washington must adjust to the new world.

    To delay or halt its economic decline, America has every reason to embark on military adventures possibly triggering a war in Syria, Iran or North Korea or even a war with China, for example.

    The petrodollar system has so far provided at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. China wants to emulate the dynamic.

    A confident China buoyed by the success of its crude oil futures contract and an America enraged by the potential dollar loss of its coveted reserve status make a toxic combination where some kind of miscalculation or accident is more likely. That is why the oil world is in panic mood.

    Dr Mamdouh G
  • Jon Engh on July 23 2018 said:
    "I am a student of the financial players and their influence into oil prices, and generally look at the movement of speculative money in and out of the futures markets. But even here there hasn’t been a discernible reason for oil’s latest drop. According to the COT reports, long positions have actually held fairly steadily through this latest 7 dollar downdraft in oil. "

    The link you provided had the headline "Commentary: Hedge funds quiet BEFORE oil-price plunge". What you need to look at is how they positioned themselves the week oil prices acually went down.

    From John Kemps twitter account this week:

    HEDGE FUNDS cut combined net long position in six major petroleum contracts by -178 million bbl in week to Jul 17
    Third-largest one-week reduction on record
    Largest since Mar 2017

    Net position changes:
    Brent -95mn bbl
    WTI -34mn

    So yeah, no surprise really. The financial players are to blame
  • patricio on July 24 2018 said:
    of China dump US debt its face value go dow and interest rate go up, this gonna to strong dollar not weak.

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