Donald Trump faces an interesting set of economic and geopolitical circumstances heading into the 2020 election. The President would obviously like the US to be in strong economic shape with robust GDP growth, low unemployment and low interest rates in November of next year. But he also would like to be ‘tough’ on China and Iran. Unfortunately, being tough on Iran comes at the cost of driving gasoline prices higher – something Mr. Trump hates- and being tough on China comes at the cost of lower GDP growth. But there is one potential short-term fix to this pair of issues which Trump can use to help provide an economic salve to voters via cheap gasoline and even gain apply as a bargaining chip with Beijing; let China buy a little more Iranian crude.
When it comes to politics and gasoline prices, the relationship is murky. It’s impossible to prove that high gas prices lead to lost elections, but we intuitively accept that voters don’t like their wallets to be squeezed at the pump. In somewhat recent US history, climbing fuel prices helped weaken consumers in the early 2000s before the tech crash and again 2006 and 2007 leading up to the housing market crash. Trump obviously wants American voters to feel financially confident on their way to the voting booth and cheap gasoline is an important part of this recipe.
Fortunately for Trump, he has an extremely valuable insurance policy against higher gasoline prices in his ability to let China quietly resume purchases of Iranian crude. The oil market has suffered from chronic oversupply in 2019 despite Iran’s exports being driven to just 64k bpd in July (according to Bloomberg.) If bullish circumstances were to bubble up in the oil patch, Trump could easily adjust Iran / China trade flows to ease the pressure. China imported 0 bpd of Iranian crude in July after averaging 540k bpd in the twelve months prior. This represents easy card for Trump to play to ease gasoline prices in the US should he need to use it. The move could also be used as a valuable bargaining chip with Beijing in trade negotiations. This set of circumstances makes Trump a sort of anti-OPEC with the ability to remove upside risk from the oil market opposite how the Vienna-based cartel manages downside risk.
More currently, prices came crashing down on Wednesday morning after both the API and EIA reported crude oil inventory builds, triggering once again a selloff in crude oil futures, erasing all gains of earlier this week. While the trade war continues to keep oil traders on edge, the real long-term threat to crude markets is the demand side of the ledger. The IEA reported this week that global crude demand for January through May of this year was at its lowest mark since 2008.
- Brent crude rallied back above $61/bbl earlier this week on optimism that a resumption of US/China trade talks and an agreement to postpone tariffs on Chinese goods set for September 1st could pave the way for real trade progress. Brent has gained $5 at the beginning of the week, and fell back below $59 per barrel and continues to see a bearish trend trading below its 50- and 200-day moving averages.
- Equity markets similarly bounced on the US/China news this week. In the US the S&P 500 jumped back above 2,900 and in Europe the Euro Stoxx 50 rallied above 3,350. In Asia the Shanghai Composite had a more modest gain and traded near 2,800 while the Nikkei was flat near 20,600.
- Russian leadership stated a desire to continue working with the Saudis to balance the oil market as long as demand woes persist. The comments followed a warning from the IEA last week that the global demand outlook remains fragile.
- US government bond yields continued to sink on expectations that more rate cuts could be on the way from the US Fed. The yield on the US 10yr bond fell to 1.68%.
- Iranian crude exports sank to just 64k bpd in July (via Bloomberg) from almost 2m bpd just last August. We’re firm believers in the idea that Donald Trump can use this as ‘spare capacity’ to play with and allow some Iranian crude to enter the market should US drivers start to feel pain at the pump. Iranian exports to China were 200k bpd in June and 0 bpd in July after averaging about 540k bpd in the twelve months prior.
- Hedge funds were net sellers of ICE Brent last week to the tune of 12k contracts bringing total net length to 264k. Fund net length is lower by about 35% since April.
- Spread markets moved slightly higher this week in the front of the curve with the prompt Brent 1-month spread near +40 cents.
DOE Wrap Up
- US crude oil inventories had a seasonally abnormal increase of 2.4m bbls last week to 439m and are higher y/y by 8% over the last four-week period.
- The increase was largely due to a surge in net-imports. Traders imported 7.15m bpd of crude last week and exported only 1.85m bpd for net imports of 5.3m bpd last week versus and average of 4.1m bpd in the previous four weeks.
- The US currently has 25.4 days of crude oil supply on hand and is higher y/y by about 10% over the last four weeks.
- On the bright side, inventories in the Cushing OK delivery hub fell by about 1.5m bbls to 47.4m last week for their lowest print in about three months.
- US crude production continued to bounce back after the hurricane two weeks ago and printed 12.3m bpd last week which was within 100k bpd of its all-time high mark.
- Finally some good news on the demand side! US refiners processed 17.78m bpd of oil last week which was within 204k bpd of its all-time high print in August of last year. Unfortunately, demand is still lower y/y by about 150k bpd over the last month and lower by 350k bpd YTD in 2019 through early August.
- US gasoline stocks jumped more than 4.4m bbls last week to 235m and are lower y/y by about 0.5% over the last four week period.
- The US currently has 24.5 days of gasoline supply on hand which is higher y/y by 2% over the last month.
- US gasoline demand + exports printed 10.4m bpd last week and is lower y/y by about 100k bpd over the last four weeks.
- US distillate stocks increased by about 1.5m bbls last week to 137m and are higher y/y by about 10% over the last four weeks. We increasingly worried that the weak diesel fuel fundamentals are driven by a larger than-thought slowdown in the US agricultural sector due to the trade war.