U.S. - China Trade Agreement Will Affect Oil

#1

One tenet of the U.S. - China Trade Agreement reached in substance yesterday requires China to buy crude oil from the U.S. When the 80-page agreement is finally signed and a copy of it is released to the public in its final form, we will see the volumes of oil China is promising to buy from us. This entices China to stop buying oil illegally from Iran, and provides a new (a hefty) market for our crude. This, no doubt, is a big part of the reason why oil is touching $60/bbl on NYMEX again.

I personally expect it to rise higher, especially in January after the final agreement is formally signed, and we get to see the volume of oil China is promising to buy from us each year. Based on all of this, it is reasonable to project oil prices will rise above $70 but probably level out around $75.

Oil companies with cash and savvy will take advantage of this unfolding event, to position themselves to be producers of oil to be earmarked for China. Lease offers should pick up over the weeks following signing the Phase 1 trade agreement.

#2

Sorry- supply & demand will win out. No new demand since USA drilled our way out of another boom.

#3

You may very well be right about that, Todd. It just appears to me that we have a new source of “demand” that will pull on our current flow of supply. I still think we will see a bump in WTI once China begins placing the orders for crude deliveries, but perhaps not permanent. The rise probably will be slight, until the supply-demand ratio stabilizes again.

But I’m also keeping my eye on the growing number of bankruptcies and mergers taking place among private companies throughout the industry as less financially resilient companies fail to survive the shrinking profit margin from new drills–as depletion continues to curve. The private independents have been the backbone of U.S. oil production (and royalty owner payments) for a very long time, and statistically, independents can drill and operate wells more cheaply that the majors. The majors have a higher threshold of profit margin they require in order to wildcat, or even density drill, than independents. Could the U.S. oil industry landscape be about to change?