Oil prices jumped to a four-year high, as investors reacted to attacks on President Donald Trump’s trade and energy policies from leaders of the world’s second-largest economy and its biggest oil-producing cartel.
OPEC got the ball rolling when it determined to make no changes to output quotas at its weekend meeting in Algeria, with Saudi Arabia’s energy minister insisting that the global oil market is “balanced and that he “doesn’t influence prices”, a clear reference to President Trump’s Tweet last week demanding the cartel “get prices down now!”.
Iran’s oil minister called the OPEC decision, “the biggest insult to Washington’s allies in the middle east” and hinted that global producers were ready to deal with looming U.S. sanctions on the sale of Iranian crude. This will take effect over the first week of November and is expected to take between 1.5 million and 2.0 million barrels of oil from the market each day.
Both Brent and WTI crude prices traded sharply higher in the overnight session following the OPEC meeting, with Brent contracts for November delivery rising $1.91 per barrel to $80.71, the highest since November 2014, and WTI futures for the same month gaining $1.21 to trade at $71.99 per barrel.
China followed the trend with a detailed report on the nature of tariffs and trade, just hours after levies on $260 billion worth of goods from both Washington and Beijing took effect Monday and an accusation that the U.S. was using “bully” tactics to impose its economic will on the rest of the world.
China said the U.S. has “brazenly preached unilateralism, protectionism and economic hegemony, making false accusations against many countries and regions, particularly China, intimidating other countries through economic measures such as imposing tariffs, and attempting to impose its own interests on China through extreme pressure,” according to the government white paper quoted in the state-run Global Times.
A series of holidays in Asia, which kept markets in China, Japan and South Korea closed for the session, limited trading on other benchmarks in the region and pushed the MSCI Asia ex-Japan index 0.9% lower heading into the final hours of dealing.
Away from equities, the U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked modestly higher from its Friday levels at 94.22 while benchmark 10-year bond yields were holding at 3.078% ahead of the Federal Reserve’s two-day rate setting meeting which beings Tuesday in Washington.
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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