The threat by President Trump to impose a tariff on all goods coming from Mexico until the surge of undocumented immigrants crossing the border is controlled by Mexico helped reinforce the bearish bias apparent in the oil market. The weakness appeared to reflect disruption to the cross border energy trade between the US and Mexico. Currently Mexico exports over 600 /d of crude oil to the United States while Mexico buys close to 1 mb/d of crude and products from the US. The prospect that the imposition of tariffs will disrupt this trade helped undermine values and led to active long liquidation that carried July Crude to below 53.50, the lowest price levels since January. Products and particularly Gasoline declined in sympathy on fears that it would be impacted by lower exports but also by the lifting of curbs on E-15 Gasoline as a means to help farmers who had already been hurt by the trade war with China but also now by the potential for a trade war with Mexico.
The concern that the tariff which starts on June 10 would force a retaliatory measure by Mexico along with inhibiting the passage of the Free Trade Agreement that was to replace NAFTA led to renewed fears over economic prospects that were manifested in sharp losses in the equity markets. Additional concern was also apparent on the impact on various refiners that import Mexican crude that was being used to offset the loss of Venezuelan barrels for blending with lighter US crudes.
Although trade worries have been a dominant feature of the US crude market; as tension built between China and the US, the situation is being exacerbated by the ratchetting up of trade tension in Mexico. Of concern is the appearance that the market had already shown a bearish bias on the inability to respond to either the Iranian or Venezuelan sanctions as the markets remains adequately supplied by expanding US production and now the prospect demand will be adversely impacted by the trade dispute will likely continue to weigh on values and limit recovery rallies.
Nat Gas values fell sharply on not only the big storage build reported yesterday indicating stocks had built by over 114 bcf but also in response to the threat of US tariffs on Mexican exports to the US. Currently over 4.5 bcf are exported from the US to Mexico. In addition, fears the tariffs might also impact economic activity and reduce industrial demand also weighed on values. With stocks at more comfortable levels and weather turning milder, it appeared the better availability outweighed the favorable impact that higher export levels of LNG might have. Today’s breakdown looks to have further to go on the downside until more formidable demand develops and absorbs some of the excess production with potential to test the 2.30-2.35 level basis July. Early estimates for next week’s EIA point to a storage build of 107 bcf compared 102 on the five year average.
Charts Courtesy of DTN Prophet X
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options ADMIS position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to. The authors of this piece currently maintain positions in the commodities mentioned within this report. Charts Courtesy of DTN Prophet X, EIA.
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