Is This Saudi Arabia’s Newest Strategy To Boost Oil Prices?

Submitted by Nick Cunningham via OilPrice.com,

OPEC’s new strategy to balance the oil market is to cut oil exports to the U.S., a move intended to drain near-record-high crude oil inventories.

OPEC originally thought that six months of combined production cuts would be sufficient to balance the oil market, but the market still looks oversupplied. Not everyone agrees on this. The IEA has argued that we probably have already reached balance, which is to say, demand has caught up with supply. The energy agency says that the market is moving into a supply deficit situation in the second half of this year, if it hasn’t already.

But the problem is that the one metric that OPEC officials themselves have held up as the key barometer to watch is the level of global crude oil inventories, rather than the immediate supply/demand balance. And on that front, they sort of shot themselves in the foot by ramping up exports just ahead of the implementation of the cuts late last year.

Elevated exports in November and December meant that huge volumes of oil started reaching U.S. shores in January. It is no wonder that U.S. inventories surged in the first quarter. The flood of oil set back OPEC’s efforts right off the bat, and even close-to-100-percent compliance on the production cuts was not enough to drain inventories at the speed needed to declare victory by June.

The huge increase in U.S. inventories means that OPEC needs six months just to get inventories back to where they started at the end of last year. Producers unintentionally accelerated activities that would ultimately obstruct, and for a period reverse, the very rebalancing they were trying to accelerate, Ed Morse, head of commodities research at Citigroup, said in April.

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So, here we are, back at the starting line, this time with a promise of nine more months of cuts. OPEC’s strategy this time around is to directly target U.S. inventories, rather than simply taking barrels off of the global market. “Exports to the U.S. will drop measurably,” Saudi energy minister Khalid Al-Falih told reportersafter the OPEC meeting last week. Some sources familiar with the Saudi strategy told Bloomberg that Saudi oil exports to the U.S. will drop below 1 million barrels per day in June, a reduction of 15 percent below the average so far in 2017. If the Saudis keep exports below the 1 mb/d threshold, it will be the lowest level of exports to the U.S. in years.

In a global marketplace, why does it really matter where the Saudis send their oil? In terms of global supply, a barrel sent to Asia is the same as a barrel exported to the U.S., so what’s the point of targeting the U.S., specifically?

The logic is that the U.S. has nearly real-time data on crude oil storage, unlike most other places in the world data that is publicly available. Some analysts believe that oil inventories have been falling around the world for quite a while even as they climbed in the U.S., but because the markets pay close attention to U.S. data, the increase in U.S. inventories in the first quarter weighed on sentiment and prices. After all, nobody really knows what is going on with storage levels in China, for example.

But precisely because the U.S. has transparent data, Saudi officials believe that they can provide a jolt to the market but attempting to put a dent in storage tanks along the U.S. Gulf Coast. The strategy could have some merit. “The market has been given clear independent and verifiable metric of how Saudi cuts — and hopefully broader OPEC — are working out over the summer, Amrita Sen, chief oil analyst at Energy Aspects Ltd., told Bloomberg.

It will take a bit of time for the effects to be felt. The typical transit time for an oil tanker from the Middle East runs from 35 to 55 days, according to Bloomberg, which means that the U.S. import data should start showing some signs of the strategy by mid-July. If imports drop off, that will mean more oil will have to be drained out of storage. When that occurs, oil traders will grow more confident that the market is on the mend.

Of course, if Saudi Arabia simply reroutes some of those exports to Asia, then inventories in Asia could rise. But, because the data is poor, the markets might not realize that the barrels originally destined for U.S. shores are not actually coming off the market but are turning up elsewhere.

Trump criticizes German trade surplus, again

President Donald Trump has criticized Germany’s trade surplus with the United States, drawing attention to a contentious issue at a summit of world leaders where trade is already a sticking point.

As the leaders of seven wealthy democracies gathered for difficult talks on trade and climate change, Germany’s Der Spiegel reported that Trump had told EU leaders the day before that the Germans were “bad, very bad” when it came to trade.

White House economic adviser Gary Cohn said the president’s comments focused on the surplus and not the country: “He said they’re very bad on trade, but he doesn’t have a problem with Germany.”

Cohn noted that “his dad is from Germany” and that he had said: “‘I don’t have a problem with Germany. I have a problem with German trade.”

The president of the European Union’s executive commission, Jean-Claude Juncker, said Trump was “not aggressive” in his comments about the surplus and called the report “exaggerated.”

It’s not the first time Trump has taken aim at Germany’s trade success. In January, he said that German car manufacturers like BMW could face U.S. tariffs of up to 35 percent if they set up plants in Mexico instead of in the U.S. and try to export the cars to the U.S.

Trump has said he wants trade to be balanced, fair and free so it benefits U.S. workers and companies. He has focused on relationships in which the U.S. buys more than it sells in partners’ markets- as is the case with Germany and China.

Trump also has pushed back against earlier G-7 agreements to “fight all forms of protectionism.” G-7 finance ministers meeting in Bari, Italy, earlier this month agreed only to say they are “working to strengthen the contribution of trade to our economies.”

German Chancellor Angela Merkel said she spoke to Trump about the matter.

Merkel said Friday at the summit that it’s well known that Germany sells more to the U.S. than it buys from America, “which on the one hand has to do with the quality of our goods,” but noted that there is also a lot of German direct investment in the U.S.

“In my opinion, one has to see these things together,” Merkel said.

She also noted that Germany should not be singled out. German news agency dpa reported that she said: “We have a currency union. We are practically a common market. To pick out one country is, I think, not so appropriate.”

Trump is not the only leader to criticize Germany’s trade surplus. Then-Prime Minister Matteo Renzi of Italy said last year that it wasn’t good for the eurozone economy.

Germany’s trade surplus with the United States is part of its large overall surplus with the rest of the world. Last year, Germany ran a current account surplus – the broadest measure of trade and investment flows – of 8.7 percent of annual economic output.

The country benefits from producing competitive goods such as luxury autos and industrial machinery that are in demand in the rest of the world. A weaker euro has helped the export performance.

Germany, however, can’t do much about the euro: its exchange rate has been driven down by troubles like the debt woes in Greece, and the policies of the European Central Bank.

Further complicating the picture, some large German companies also invest, hire and produce in the United States.

BMW, for instance, makes sport-utility vehicles in Spartanburg, South Carolina, and last year exported 70 percent of them – or 288,000 vehicles -to the rest of the world.

Daimler AG makes Mercedes-Benz cars in Tuscaloosa County, Alabama, while Volkswagen has a plant in Chattanooga, Tennessee.

100 Words On: Why It’s Not Poor Etiquette to Put Ketchup on a Hot Dog

There are plenty of food snobs out there who insist that it is sacrilegious to put ketchup on a hot dog. That assessment is echoed by The National Hot Dog Council which proclaims that ketchup should never be put on a hot dog by any one over the age of 18. I find it deliciously ironic when people insist that something as gastronomically unsophisticated as the common hot dog can somehow be defiled by topping it with the most popular condiment in America.

The bottom line: Who needs mustard? There’s nothing better than a hot dog topped with ketchup and onions.

Photo Credit: EvelynGiggles

China Imposes Sugar Import Tariffs As High As 95%

While tense trade negotiations between the US and Mexico over the price and quota for U.S. imports of Mexican sugar continue (a happy ending appears unlikely, especially after a Mexican sugar company on Friday called on the government to take action against American fructose producers and protect the local industry from US deals), a new protectionist measure involving sugar half way around the globe was unveiled on Monday when China – the world’s biggest importer of the sweet substance – said it will impose significant penalties on sugar imports following lobbying by domestic mills.

According to the ruling first described by Reuters, up to a third of China’s annual sugar imports will be impacted by an extra tariff for the next three years on shipments that the government said had “seriously damaged” the domestic industry.

The details: China currently allows just over 1.9 million tonnes of imports at a tariff of 15% as part of its commitment to the World Trade Organization. All imports above this amount are slapped with a 50% levy. After Monday’s ruling, the total sugar duty will nearly double, with Beijing imposing an additional 45% tax to these imports in the current fiscal year taking the total to 95%. This will fall to 90% next year and 85% a year later, China’s Commerce Ministry said in a statement. The ruling exempted 190 smaller countries and regions from the new duty, including smaller producers such as the Philippines, Pakistan and Myanmar.

Today’s decision will drastically reduce imports from top growers such as Brazil and Thailand as it will close the big gap between Chinese sugar prices – currently double those on the London market – and international prices. However, according to traders, the higher tariffs will also likely spur increased smuggling across China’s southern border, while some imports from major producers may be shipped through third-party nations excluded from the tariffs.

While China has traditionally been a low-cost farming powerhouse, sugar is one of the few commodities where China struggles to compete given the higher costs of its smallholder farmers, who produce about 10.5 million tonnes of cane and beet sugar a year. The country then imports another 3 million tonnes a year, even as Beijing has been trying to crack down on illegal shipments of as much as 2 million tonnes a year, Reuters reports. Which is why today’s move has prompted some consternation: “while smuggling has temporarily slowed, there is a risk that the incentives for smuggling are still strong and in fact could increase if domestic prices rise,” said Tom McNeill, director of Green Pool Commodities in Brisbane.

Another reason why the tariff may backfire: it won’t take a big drop in sugar prices to offset the tariff’s impact: “Of course it will support the domestic industry for a short time,” said a China-based trader. “(But) the global raw sugar market just needs to drop a little below 15 cents” to make it profitable to import into China. Worse, Beijing may have no choice but to intervene directly in the domestic market by selling some of its state reserves to prevent supplies tightening and prices spiking.

In response to the tariff, sugar futures initially fell more than 1% as traders interpreted the move, which was in line with a draft proposal issued in April, as too lenient to staunch shipments.

Thailand, the world’s third largest producer, played down the impact of the duty. Its millers have a much lower shipping cost to China than rivals, Brazil and Australia, said Viboon Panitwong, chairman of the Thai Sugar Millers Corp Ltd, who did not expect the duty to significantly affect sugar exports. Thailand exports about 300,000 to 400,000 tonnes of sugar to China a year.

Ultimately, China’s decision is unlikely to do much to defend its domestic infustry, at least until an even higher tariff is imposed by Beijing, and the downstream effects impact global prices. It is however notable that the country which recently spoke of itself as the flag-bearer for new and improved globalization, promptly engaged in precisely the kinds of protectionist measures that it blasted the Trump administration for proposing.