On Wednesday morning, the world was rattled by the announcement that Trump would place 10% tariffs on an additional $200 billion worth of goods imported from China. The list would include consumer items such as electronics, clothing, television components and refrigerators. Just when you thought the tit-for-tat tariff dispute was done, then came the sequel, Trade Wars 2. If this is anything like George Lucas, one shudders to think how exciting episode 3 could be.
The truth of the matter is that China does not import much from the U.S. The tariffs are hurting the U.S consumers more than helping the economy. These were the same consumers that voted for Trump to "Make America Great Again." Trump is taxing the consumers and raising their cost of living, not really changing the trade deficit in any way. The U.S. imported $505 billion of goods from #China last year and has promised tariffs on $250 billion of them. There is a Senate vote on Wednesday on a non-binding measure aimed at limiting President Trump's power to impose tariffs. Glad someone sees the need to put an end to these morning rants.
Copper opened down 3% and base metal stocks got slammed between 3% and 7%. It seems panic finally set in; the last puke? This knee jerk reaction after the morning open was right -- if one is seriously worried about an economic slowdown. If that happens, then all cyclicals (especially Commodities) should be sold down. But why should oil be immune?
Investors and analysts have been so fixated on the supply outages, Trump Iran sanctions, and OPEC supply spare capacity, that they have forgotten to look at the "demand" side of the ledger. If base metal prices are down on potential demand slowing down, then surely oil should be hit by the same "global" phenomenon. And the best part is -- everyone is long, ouch!
DOE inventories reported yesterday showed crude drawing 12 mllion barrels, but demand week-on-week for gasoline and distillate was down. After printing higher on the open, it started trading off during the day. Is reality sinking in finally? According to last week's CFTC data, portfolio managers raised net their long position in U.S. crude WTI by +41 million barrels. Funds' net long position in WTI has surged by 116 million barrels in the two most recent weeks, but not that much in #Brent.
What the media fails to tell you is that WTI is surging because of a technical situation developing at Syncrude Canada; physical differential spreads are at play. Forgetting spreads, let's look at the spot price of oil. If supply is increasing by 1-1.5million bpd, and demand is at risk of falling short of 1.4million bpd (as everyone seems to be taking their views down for Copper, Zinc and other commodities, as well), then surely we should start seeing an increase in inventories sooner than later. When the oil price will be down, no doubt we will see endless headlines about "demand collapse" just a few weeks after calling for "peak oil."
According to the IEA, OPEC members held 3.4 million bpd spare capacity at the end of May. Saudi Arabia accounts for 2/3 of that, or around 2million bpd, Iraq 330,000 bpd, UAE 330,000 bpd, and Kuwait 220,000 bpd. Russia accounted for most of the non-OPEC spare capacity (roughly 250,000 bpd). The market assumes that all of Iranian imports will be displaced by assuming a full 1 million bpd will be lost. That is a bit aggressive, especially when today Trump announced that a "handful of countries' will be given relief. Could China EU and India be those handful?
However right or wrong this view may be of the world, that same view has to be equally represented across the board. Copper is down 17% from the peak since these trade wars began, yet oil is close to its peak. That seems odd, especially when one is worried about global recession -- or deflation fears, even. Oil has held these levels so far, but one questions whether the specs will be strong enough to defend their longs.
Let's not kid ourselves, no one is looking at fundamentals right now. We are trading sentiment, not logic. If one wants to talk fundamentals then let's discuss the Copper market, which is actually in a small deficit this year -- even with conservative demand/supply numbers. Can you say the same for oil?