By Phil Flynn
(Flash: The recent report that President Trump is delaying some tariff on China has boosted prices.)
We had tanking Treasury yields, the shutdown of the Hong King airport, fears of an Argentinian debt default, federal government spending at a record $3.73 trillion in the first 10 months of fiscal 2019 and a deficit of $867 billion.
The oil market was able to withstand mounting economic headwinds as it prepares for what should be a big drop in U.S. crude supply and the fact that Saudi Arabia is already reducing allocations of oil to their customers as they start to lay the groundwork for its initial public offering (again) of Saudi Aramco (ARMCO). Yes, the Saudis are getting serious about that after they had an analyst earnings call and the word that Saudi Aramco will buy a 20% stake in the oil-to-chemicals business of India's Reliance Industries Ltd., including the 1.24 million barrels-a-day Jamnagar refining complex on the country's west coast. From what analysts are saying, the call, while showing some impressive numbers, fails to live up to the $2 trillion valuation the Saudi's wanted to have.
Liam Denning at Bloomberg writes, "Taking the 12 months through June as a whole, Aramco's capital expenditures of about $35 billion left it with free cash flow of about $88 billion, more than enough to fund $72 billion of dividend payments. Putting those on an Exxon (NYSE:XOM)-like yield of 5% implies a value of $1.45 trillion. Yet, assuming ordinary dividends are running at $52 billion a year - as the accounts suggest - about $20 billion of that payout is akin to the more discretionary buybacks oil majors use to distribute exceptional income. Aramco's payout was 99% of earnings in the first half of 2019 versus just 52% a year earlier. That cyclical element should be priced at a discount to ordinary dividends, especially in light of Aramco's role in Saudi Arabia's public finances. Price the dividend at 6%, and the value drops to $1.21 trillion; at 7%, a shade higher than the yield for BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A), it falls to $1.03 trillion." Of course, because it falls far short of that valuation, it puts more pressure on Saudi Arabia to do whatever they can to keep oil prices high.
How is the tanker trade going? I will trade you one seized tanker for another. There is market talk that the UK is getting ready to release Iran's oil tanker Grace 1, following the exchange of some documents, the head of Iran's Ports and Maritime Organization said. That would mean that Iran would then release the UK tanker Stena Impero, which was detained by Iran's revolutionary guards about two weeks after the Iranian oil tanker was seized. A potential reduction of risk in the Persian Gulf, that is until someone seizes another tanker.
Gas prices in the Midwest may buck the trend of falling prices. There are reports that the massive BP Whiting Indiana refinery may shut for an overhaul in early September. John Kemp at Reuters is warning that Indiana's passenger vehicle sales are falling at the fastest rate in almost two decades, part of a worldwide decline in vehicle sales and production.
Yet oil is going to get data on inventories. Despite the fear that China stopped buying U.S. oil, we expect that this week U.S. oil exports will soar. We expect to see a big 4.0 million barrel drop in crude supply. While the world is looking at data that suggests we may see a recession, the reality is that all the major economies in the world are still growing. We also saw a report that the long-awaited pipelines to start moving shale oil are coming online.
Reuters reports that global commodities trader Trafigura has started shipments of Permian basin crude to the Corpus Christi oil hub in Texas via the newly operational Cactus II pipeline system, the company said in a statement on Monday. Trafigura signed a long-term agreement with pipeline operator Plains All American Pipeline LP last year to transport a total of 300,000 barrels per day of crude and condensate on the pipeline. The Cactus II Pipeline system will have the ability to transport 670,000 barrels-per-day.
As oil stands tall, it should be telling you something. Crude oil is fighting seasonal weakness and a surge of economic doom and gloom. While some economists declare that a recession is inevitable, oil prices are telling us something else. The growing backwardation in the market suggests that demand is strong, and supplies are relatively tight. Refinery runs are strong. We would not see that if we're close to a recession.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.