Crude: Crisis real and imagined

Crude oil prices are trying to stabilize as the market is reeling from the seasonal peak in the gasoline switchover, a potential rise in OPEC and Non-OPEC production and sanctions on China. Tough talk on NAFTA negotiations as well as a created political crisis in Italy. 

Already Italian markets are bouncing back after the political drama and fears that a populist upswing in the country could lead to Italy leaving the Eurozone. While anything is possible, the point at which Italy could even think about an exit would make an exit out of the EU unthinkable because of the deep debt and the precarious strength of their banks. Besides, unlike previously with the Greek exit we now have a Central Banker Mario Draghi that has already stated he will do whatever it takes to save the Euro. 

Reuters reported that an Italian election at this point would also be a de facto referendum on Italy’s euro membership, evoking memories of the 2011-2012 euro debt crisis and carrying huge implications for the single currency, whatever its outcome. However, reports that the two anti-establishment parties were again renewing efforts to form a government rather than force the country back to the polls helped Milan-listed equities snap a five-day losing streak.

OPEC’s nice but futile promise to raise oil production by a million barrels a day may make the market feel better, but it is not going to be enough to fill the supply void. Global markets remain tight and we are seeing a big correction in what is a longer-term bull market. It may take a few more days for oil to get its sea legs but it may come sooner as the American Petroleum Institute should report another drop in U.S. oil inventory. Last week the API reported a draw but the Energy Information Administration reported a shock increase. Both agencies should show substantial drops in supply this week.

Trade war on again? Commerce Secretary Wilbur Ross will visit China later this week for talks, but they will be conscious as the Trump Administration already laid down the hammer. The Wall Street Journal reported that the White House said Tuesday that it would announce by June 15 a final list of $50 billion in imports from China that would be subject to tariffs of 25%, with the duties implemented “shortly thereafter.”

Planned investment restrictions aimed at preventing Chinese acquisition of U.S. technology would also be announced by June 30, the White House said in a statement. The tariffs on $50 billion in Chinese imports is the first tranche in a package that the White House said could lead to tariffs on a total of $150 billion in Chinese imports.

Fear of a trade war could hurt demand for oil. This comes after China has been encouraging their refiners to buy U.S. crude oil.

Bloomberg is reporting that Canadian Prime Minister Justin Trudeau has a message for Donald Trump on Nafta: Canada would rather see a trade deal die altogether than accept certain hardline demands. Trudeau said he believed a win-win-win deal was still possible in ongoing North American Free Trade Agreement talks. U.S. Trade Representative Robert Lighthizer met Canadian Foreign Minister Chrystia Freeland earlier Tuesday in Washington to discuss the trade pact.  

“No Nafta is better than a bad deal, and we’ve made that very clear to the president,” Trudeau said Tuesday in Toronto in an interview with Bloomberg’s Stephanie Flanders, ahead of the Group of Seven summit that Canada will host next week. “We are not going to move ahead just for the sake of moving ahead.”

NAFTA breakdown could further reduce demand expectations for oil.