Is The U.S. Really Insulated From A Middle East Oil Outage?

Friday, January 10, 2020

1. Oil and gold fall on Iran de-escalation

- Both crude oil and gold fell sharply after the U.S. and Iran seemed to back away from the brink of war.

- Gold fell by $70/troy ounce on Wednesday. The de-escalation "led to higher risk appetite among market participants and sparked profit-taking in gold," Commerzbank said in a note. "This is evident for example in an ETF outflow of eight tons."

- Brent fell 4 percent on Wednesday, and actually declined by $9 per barrel between the intraday high and the close.

- "This is understandable from a purely fundamental perspective: if there are no supply outages, the oil market will be amply supplied," Commerzbank said.

2. Brazil ramps up oil production

- The U.S. is no longer the only non-OPEC oil producer adding lots of new supply. Brazil's pre-salt oil fields are years in the making, but are finally beginning to pay off.

- "The offshore bonanza [in Brazil] continued with another 125,000 b/d m-o-m jump, bringing y-o-y growth to more than 500,000 b/d and total crude supply past 3 million b/d for the first time," JBC Energy said in a report. "This strong trajectory is something we expect to be maintained for some time yet."

- The oil is mostly medium-sweet, which will come in handy in a tight medium and heavy oil market.

- Brazil joins the U.S., Guyana, Canada and Norway as one of the top non-OPEC producers in terms of supply growth.

3. German renewables soar, coal sinks

- Carbon emissions in Germany from the electricity sector plunged by a whopping 18 percent last year.

- The huge decline is the result of several factors. Higher carbon prices made coal substantially less competitive, so capacity factors were down. Likewise, renewable generation soared even as capacity additions were more modest.

- Renewables are expected to account for the largest source of generation in Germany this year, and the market share for wind and solar is only expected to climb going forward.

- The economy also hit a rough patch, with the manufacturing sector seeing year-on-year contraction.

- Carbon prices have fallen back on weaker demand, but it could be temporary. "Though we expect the carbon price to take a lengthy breather, it is likely to resume its upswing from the spring - partly thanks to a stabilising EU economy," Commerzbank said in a report.

4. U.S. import dependence down, but not insulated from global swings

- President Trump said that the U.S. no longer needs oil from the Middle East, which is only somewhat true.

- Indeed, U.S. import dependence from the Middle East has fallen to around 10 percent, the lowest level in three decades. But the U.S. still imports around 8 mb/d of oil, even as it becomes a growing source of exports.

- But to focus on imports and exports, or the U.S. achieving a net positive balance on exports recently, is to miss the point.

- Oil prices have regional discrepancies, but the market is global. Even if the U.S. did not import a drop of oil from the Middle East, a war that knocked supplies offline would very much affect pump prices in the U.S.

- President Trump is far from the only powerful official in Washington that seems to think that a net positive export balance insulates the U.S. from global volatility.

5. Energy industry's market cap declines

- Natural gas prices at Henry Hub averaged just $2.57/MMBtu in 2019, down 60 cents from a year earlier and a three-year low. But prices ended 2019 and started out in 2020 at even lower levels, trading below $2.15/MMBtu.

- Low prices contributed to higher rates of gas burn in the power sector, and more LNG exports.

- Exports to Mexico via pipeline averaged 5.1 Bcf/d in the first 10 months of 2019, up 0.4 Bcf/d from a year earlier.

- LNG exports averaged 5 Bcf/d, a 69 percent increase from a year earlier. The inauguration of the Cameron LNG terminal in Louisiana, as well as the Corpus Christi LNG and Freeport LNG facilities in Texas added new capacity.

- The U.S. is now the third-largest LNG exporter, behind only Qatar and Australia.

6. Increase in steel prices a positive sign for the economy

- Nucor Corp. (NYSE: NUE), the largest steelmaker in the U.S., increased its prices in October for the fifth time.

- The price increases are likely a reflection of a rebound in demand, according to Bloomberg, a positive sign for the U.S. economy.

- Prices for U.S. Midwest hot-rolled coil steel have climbed by 19 since November.

- The fall in interest rates last year provided a boost to the housing market.

- The price increase from Nucor is "a positive for steel sector sentiment," and "the move will be broadly supported by peers," Jefferies LLC analysts including Martin Englert and Alan Spence told Bloomberg.

7. U.S. manufacturing falls into negative territory

- The Institute for Supply Management PMI for U.S. manufacturing activity fell to 47.2 in December, indicating contraction for the sector. That is the weakest reading for U.S. manufacturing in a decade.

- However, the IHS Markit PMI posted a more positive 52.4 reading, suggesting a rebound. The wide discrepancy between the two metrics is particularly pronounced in last month's data.

- The ISM version has greater representation of conditions in the Midwest, which has been hit harder by the slowdown.

- It's unclear which reading better reflects broader economic conditions, but the U.S.-China thaw could provide a tailwind.

- "Global trade remains the most significant cross-industry issue, but there are signs that several industry sectors will improve as a result of the phase-one trade agreement between the U.S. and China," said Timothy R. Fiore, chair of ISM, told CNBC.