Open Insights: EIA's Weekly Petroleum Report (05/03/19)

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by: Open Square Capital
Summary

We review EIA's Weekly Petroleum Status Report for the week of May 3, 2019.

Crude inventories decreased by 4.0M barrels for the week. Refinery throughput continues to lag seasonally.

Headlines are currently dominated by US / China trade war talks. We provide our analysis. The political clock ticks louder.

Continuing our weekly series, Open Insights, we'll take a look at the EIA's Weekly Petroleum Status Report ("WPSR") for the week of May 3, 2019.

EIA reported a crude draw of 4.0M barrels for the week. Imports declined precipitously by 0.7M barrels per day (bpd) from last week and reached 6.7M bpd, which is nearer the four week average. Exports also weakened by 0.29M bpd and registered 2.3M bpd. Given where WTI/Brent spreads are (still hovering near $8.60/barrel), we anticipate exports to remain healthy, particularly as non-US demand increases as supply outages and increasing refinery throughput heightens increased demand amidst tight supplies.

Refinery utilization increased slightly by 0.8%, but this was gross (which includes NGL). Net crude throughput actually declined slightly, and turnaround and unplanned outages continue to affect the refining complex.

Compared to 5-year averages, this week's report was bullish for crude and neutral for petroleum products. Let's just go through the charts quickly.

Gasoline inventories decreased slightly by 596K barrels, and distillates declined negligibly by 159K barrels for the week. Compared to the 5 year average (2014-2018) gasoline inventories continue their downtrend.

Overall total crude and products decreased by over 1.7M bpd for the week.

As always, we'll leave you with some food for thought.

We're on the clock now. With the US/China trade war now dominating the headlines, we believe the shape of oil demand for H2 2019 will be decided in the next month.

The question for the US isn't whether a deal is available. We think the question becomes how much of a concession is the US willing to make? Currently, the US is asking for specific changes to China's laws governing intellectual property rights, forced technology transfer and market access. These issues have been contentious, but a core focal point for the US' efforts.

In the early part of 2019, President Trump's leeway to negotiate these issues using hard-line tactics was largely based on the strength of the US economy and the stock market. By nature these arenas are filled with much more disparate and shorter-term interests and stakeholders, who's support for anything that impacts their bottom-line can easily alter their allegiance. Fortunately for the administration, the strength of both provided a solid platform to negotiate aggressively. In turn, the strength of the economy is also one of the few things the president can claim success for as his administration has presided over a period of unprecedented US economic growth. Thus, it'll be a cornerstone on which he runs for reelection.

Politically, President Trump faces a contentious 2020 election, one that will officially kick-into high gear as the Democratic primaries start getting heavy with Iowa up first on February 3, 2020. This means the candidates and the attacks on the administration will steadily become louder into year-end as each tries to distinguish itself as to why the administration has failed to fulfill its promises. So expect the political rhetoric and pressure to ratchet higher.

Congressional Democrats have already prepositioned around the trade war issue, publicly supporting a hard-line approach to China and doubting President Trump's ability as a negotiator. Why? Because it's a win-win. On one hand, it forces the President to negotiate hard, benefiting technology firms that have historically leaned left, but it also sets the bar higher for Trump to succeed in closing a deal or closing one that's tough on China. A weakened agreement would allow Democrats to use the issue as a cudgel against the Republicans in the 2020 campaign, and no agreement prepositions the party as a stronger alternative to stand firm against China's ambitions. In either case, taking a tough stance also gives the Democrats ammunition if it were to choose to stall the passage of any trade deal in Congress, denying a quick victory for Republicans.

For now, however, the administration must contend with a shifting political calculus as trade/economic concerns give way to political ones. With a longer timeline, the former controls, but as the political calendar shortens, the latter takes prominence. Your policies and the continuation of those policies only matter if you're in power, and the voters will typically vote on the most immediate pressing issue, particularly if that issue impacts their wallet. For farmers, manufacturers, etc. impacted by the tariffs, the runway between patient and anxiety is nearing an end. There's little time to conclude a treaty, avoid a political backlash and attacks by your newly nominated opponent and continue to steer the economy on an upward trajectory/inflection point. President Trump knows this, and hence the heightened sense of urgency as the campaign period fast approaches.

China

China knows this as well. China also knows that 2019 is the 70th anniversary of the founding of the People's Republic of China, which will be celebrated nationwide on October 1st with military parades and the appropriate pomp and circumstance. Thus, nationalism, foreign/domestic strength and projecting political power will undoubtedly be what the Chinese leadership wants. Also not lost among party members is that early June marks the 30th anniversary of the Tiananmen massacre, a pro-democracy event that directly challenged the political authority of the communist party, and to this day cannot be memorialized publicly in China. Against this backdrop, China's political leaders have every incentive to negotiate tough and appear strong domestically and internationally.

For the Chinese, it's now engaging in political time arbitrage. I can do anything you can do better, I can stand political pressure better than you. Knowing that the Trump administration is on the political clock, China is accepting short-term pain for longer-term leverage. If the talks fail to yield an agreement, China can simply wait to play the administration against the designated Democratic nominee, or even gamble on an administration change. In the meantime, stimulate and wait. Either way, staying patient and dragging out the proceedings means China is able to strengthen its hand and weaken the US's leverage.

Although the tariffs were imposed on Friday, the real economics impacts (along with China's retaliatory tariffs on $60B of US goods) will not be felt until early June. There's still time, but that time is closing. If push comes to shove, we doubt the Trump administration will continue on its hawkish trade path given the political implications. If push came to shove, we think USTR Lighthizer's plan will be the one that receives the nudge.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.