Apparently, senseless murder triggers no hesitation when considering business partnerships as President Donald Trump announced on Tuesday that the U.S. will stand with Saudi Arabia, despite the fact that the CIA concluded that Saudi Prince Mohammed bin Salman ordered the assassination of journalist Jamal Khashoggi.
“It could very well be that the Crown Prince had knowledge of this tragic event. Maybe he did and maybe he didn’t”
–President Donald Trump
Ignoring for the moment that President Trump might not the greatest judge of character in the world, the president made it clear that is alignment with Saudi Arabia was pure with the interest of keeping oil prices low. Trump told reporters that “if we broke with them [Saudi Arabia], I think your oil prices would go through the roof,” according to CNBC. It seems, at least on the surface, that the cost of crude far more important to the US than the murder of an American journalist. Despite Trump’s comments and collaboration with the Saudi government, as of November 8th, oil is officially in bear-territory.
Earlier this month President Trump announced plans for imposing sanctions on Iranian oil production. The plan, via the sanctions, was for Iran, the world’s fourth-largest producer of crude, to slowly recede from the market, and in turn, Saudi Arabia would ramp up their own production of crude. On paper, Trump’s sanctions seemed fool-proof, and in anticipation, the price of Brent crude (CO), the international benchmark, went above $86 in early October, according to the Economist.
Instead, the oil industry failed to meet the expectations of the Trump administration. Last week, the price of Brent (CO) crude remained at $66.53 per barrel, and West Texas Intermediate (CL), the American oil benchmark, has suffered the longest uninterrupted decline in thirty years. The downtrend for the U.S. crude benchmark, according to MarketWatch, is on the brink of forming a death cross — “a chart formation in an asset that many market technicians believe marks the point that a short-term decline morphs into a longer-term downtrend.”
The oil market’s recent volatility could be attributed to recent attempts from several members of the Organization of Petroleum Exporting Countries’ (OPEC) to be the authoritative voices for the international crude market; America, Russia, and Saudi Arabia. Over the course of the last year, especially after Trump’s Iranian oil sanctions, America because the world’s number-one producer of crude. According to recent reports, American oil output in August was 23% above the level twelve months earlier, and with greater inventory comes lesser demand from consumers, and cheaper prices overall. News like this is not what investors want to hear, they expect higher returns and the surplus of crude is not helping the issue.
Edward Morse, an energy economist from Citigroup, blames President Trump’s trade policies for the recent depression in global demand for crude. Before he was sworn into office, Trump made it clear from the very beginning that brings production back to America was at the top of his platform heading into the 2016 election season. The whole “Make America Great Again” tagline was born out of the notion that the country’s foreign dependence on manufacturing and production had gotten out of hand.
When Trump took office, he acted on his campaign promises and has since worked to lessen America’s need for foreign imports. As a direct consequence of Trump’s crackdown on American exports, the growth in air freight and shipping has dropped nearly 50% in the last year, resulting in a dampened need for diesel fuel.
As we had into 2019, investors in the crude industry are hungry for oil price forecasts. Some analysts believe that oil prices, albeit falling as of recent, could spike soon. OPEC and its partners are scheduled to meet in Vienna next month, which could cause the market to react either way, depending on how the meeting goes.
Why Were Refining Stocks Under Pressure In May?
Last month, many industries went into turmoil and one of those was the oil refinery industry. This was due to the global events that shook up the capital markets. Some of the better-known oil refiner stocks like Marathon Petroleum (MPC), Phillips 66 (PSX) and Valero Energy (VLO) took a nosedive. According to information from S&P Global Market Intelligence, the declines for the month ranged from 12% to 23%.
There is a number of factors which are responsible for the decline in oil refinery stocks for the month of May. Perhaps the biggest reason is the escalating trade tensions between the United States and China.
It was in May that the talks broke down between the two nations and the tariff wars started yet again. The trade standoff has resulted in a significant drop in the demand for refined oil products. Consequently, the profit margins of the major oil refinery companies were hit.
However, in addition to the trade war with China, the United States had also threatened to impose tariffs on Mexican goods if the immigration issue was not tackled. That was another negative trigger for oil refinery stocks since a hike in tariffs would force Mexico to send a lower quantity of crude oil to the United States and the refinery companies would need to look at more expensive sources. On top of that, the current issues in the middle east have not helped the matter either.
The major companies in the industry reported significant drops in their earnings, with Valero’s earnings nose-diving by 41%, while Phillips 66 recorded a 50% drop in earnings. On the other hand, Marathon Petroleum earned $11.17 for each barrel in the first quarter as opposed to analysts’ estimates of $13.85 per barrel. The margins were hit due to higher oil prices.
Despite the troubles that the companies went through in May, the future may not be as gloomy. One analyst stated that Valero and Phillips 66 could be a good prospect for investors since the stocks are being weighed down by trade issues rather than any fundamental problem with margins. In fact, JP Morgan has already upgraded Valero and classified it under overweight.
Where Will Oil Go After This Week’s Price Hit?
Even though oil had been taking a beating over the last 2 trading sessions, its price rose to $69 per barrel on Friday. However, oil prices are experiencing the worst week of 2019 mainly due to potential economic slowdown and ever-growing oil inventories. US oil inventories have not been this high since July of 2017. And to top it all off, the trade war between the US and China is growing wearier every day further affecting oil prices.
Naeem Aslam, the chief market analyst at TF Global Markets, stated, “Clearly, bargain hunters are back in town.” He later added, “However, it is still set to record the worst week of the year and this is due to the increase in trade war tensions between the U.S. and China.”
The global benchmark for oil, Brent Crude, has experienced a decrease of 5 percent this week. However, Brent Crude this morning climbed $0.98 to value each barrel at $68.74. Due to US sanctions and voluntary supply cuts, a floor under prices held. Market analysts are expecting the oil market to recover off of the price floor.
“It is reasonable to doubt whether Saudi Arabia will be willing to step up its output given the latest decline in prices, […] we therefore expect to see higher oil prices again in the near future,” Explain analysts at Commerzbank.
In order to make the market tighter, the Organization of the Petroleum Exporting Countries has been cutting oil supplies since the beginning of the year.
Brent Crude’s prices reflect that the supply and demand of oil is tightly knit. According to UBS, Brent Crude should get back to $75 this month as supply gets tighter and tighter.
“Compliance of OPEC and its allies to the production cut deal remains high, while production from Iran and Venezuela is likely to again trend lower this month,” explains analyst Giovanni Staunovo,
Renewable Energy Drives Power And Utility Merger Activity
As has been advocated by a range of energy experts across the world, renewable energy could be positioned to go mainstream. More are pushing to save the planet from things like global warming. As of now, the indications are there that at a global level, renewable energy is growing.
According to available data, the renewable energy market was the frontrunner in the global energy market. The biggest reason for the growth was strategic mergers and acquisitions. It is a particularly significant development. The fact remains: mergers and acquisitions have largely slowed down across the world within the industry.
According to a report by global consultancy firm Ernst & Young, “Power Transactions and Trends for the first fiscal quarter of 2019,” renewable energy mergers and acquisitions grew at an impressive rate. The total value of mergers and acquisitions rose by $3.7 billion from the fourth quarter of 2018.
It is noteworthy that the mergers and acquisitions in this niche accounted for a whopping 61% of all deals in the power and utility industry in Q1 2019. At the same time, mergers and acquisition activity had declined at a global level in the quarter. This decreased by as much as 33% from the $20.4 billion in Q4 2018.
Despite the overall decline in the merger and acquisition activity, executives are confident that things will pick up soon. According to an industry-wide survey, 92% of the executives believe that economic growth at a global level is going to increase. The same percentage of executives also think that the power and utility sector itself will grow in the coming months.
It’s far more important to point out that 97% of the respondents in the survey stated that they are going to make major investments this year. Much of that might go towards modern technology.
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