Oil rebounds despite trade war fears
Oil prices rebounded on Friday having fallen the day before due to growing tensions between the Trump administration and China regarding tariffs and the increasing likelihood of a trade war.
Oil prices fell sharply on Thursday on news of $60 billion worth of tariffs on China. China followed up on Friday with an initial announcement of $3 billion worth of tariffs on U.S. pork, fruit and recycled aluminum and steel pipes. Wall Street fell sharply over fears of a brewing trade war. That dragged down oil prices, although benchmark prices rebounded in early trading on Friday.
Oil prices rose by 1 percent on Friday morning after Saudi Arabia said that the OPEC production curbs could be extended into 2019. “We still have some time to go before we bring inventories down to the level we consider normal,” Saudi oil minister Khalid al-Falih told Reuters. “We will hopefully by year-end identify the mechanism by which we will work in 2019.”
President Trump tapped former U.S. Ambassador to the UN, John Bolton to replace H.R. McMaster as National Security Adviser. The reshuffling is widely seen as a major shift towards a hawkish foreign policy, raising the odds of conflict with Iran and North Korea, in particular. As the year wears on, U.S. confrontation with those two countries could be incredibly bullish for oil.
The Trump administration announced plans for a variety of tariffs targeting an estimated $60 billion worth of Chinese goods. The move was met with a stock market selloff, which also dragged down crude oil.
Top shale companies like Devon Energy (NYSE: DVN) and Marathon Oil (NYSE: MRO) scooped up acreage during the market downturn several years ago, and production is now coming online. Devon says its output in STACK will jump to 140,000 barrels of oil equivalent per day (boe/d) by the end of the year, up from107,000 boe/d in early 2017.
Most of Devon’s spending in STACK will be directed at the Meramec formation. The bottom line is that shale companies are looking at the Meramec because of low breakeven prices, combined with the fact that Permian land prices are already sky-high, which has forced many in the industry to look elsewhere.
OPEC said that oil inventories in the OECD are only 44 million barrels above the five-year average, which suggests the oil market is getting close to “re-balancing.” However, OPEC officials have recently commented that the measurement might not accurately portray the state of play in the oil market, and the group is looking at other metrics. Some ideas include non-OECD inventories, floating storage, and days of coverage, although nothing has been decided.
Olusola Bello