The GERM Report

-Russia and Saudi Arabia are at it again.

-Hong Kong’s status as a global financial hub is in serious jeopardy.

The spot price for Brent crude oil was in positive territory early Thursday, though front-month contracts were down after the American Petroleum Institute reported a sizeable build in US crude oil inventories. Concerns about overflowing storage have faded, though the price and demand recovery since the April collapse may be incentivizing production. Meanwhile, the trade war between the United States and China seems to have enjoyed only a brief cease-fire as tensions over Hong Kong, and its financial position, escalate. Elsewhere, the logistics of shipping may get more complex as the Trump administration grapples with how to deal with sanctions busters.

The spot price for Brent was up some 2.8% as of 8 a.m. ET to $35.55 per barrel, though most of the trading is now concentrated in the August contract as July closes in on expiry. Forward pricing for the global benchmark was in the red, though trade levels through December remained above $35 per barrel. The price point will be tested later in the day by EIA data on crude oil inventories, mounting US jobless claims and when US federal reserve chiefs take the podium.

The API on Wednesday reported a mixed bag of sorts, with total US commercial crude oil inventories increasing by 8.7 million barrels for the week ending May 22, though stocks at Cushing, Okla., the delivery hub for West Texas Intermediate, fell by 3.4 million barrels. Concerns that Cushing would overflow, among other more technical factors, pushed WTI prices deep into negative territory last month. That’s incentivized moves into the front-month contract, with August volumes for Brent at the highest for the calendar year. Price recovery may also be incentivizing production. The EIA reported total US oil production in decline, with the four-week moving average for the week ending March 15 down 3.5% from the same period last year, though the cumulative daily average was up 4.8% year-on-year. Rig counts are in a precipitous decline, though many shale players have long ago abandoned calls to ration production.

Outside of, but related to, US production trends and parties to the OPEC+ curtailments continue to debate their next steps. Russia, which said the price for its Ural benchmark was already above expectations, has yet to endorse an extension of the 9.7 million barrel per day mark outlined in the current agreement. Saudi Arabia, which needs a price closer to the $80 range, may be pressing to extend the curtailments to year’s end. Russia at the onset of the global pandemic suggested demand destruction was temporary and balked on tighter restrictions. That sparked the battle with Saudi Arabia over market share, contributing to the tremendous drop in crude oil prices last month. Another round of fighting would be damning for an already-bruised oil market, though it would disincentivize US shale production.

In a war of a slightly different kind, the Trump administration has picked up economic arms again to fire at China. An 18-month trade war threatened to dampen global growth, though a so-called Phase 1 trade deal held out promise of a respite. That respite is over. US Secretary of State Mike Pompeo notified Congress on Wednesday that Hong Kong no longer qualifies for a special status as an autonomous entity separate from China. That seriously jeopardizes its position as a global financial hub, leaving skittish international investors even more wary about current economic conditions.

Elsewhere, several tankers laden with Iranian fuel are headed to Venezuela, with only two purposely responding to US sanctions threats. Both Iran and Venezuela are targets of intense US sanctions pressure, though for Iran, it may be better at operating under sanctions than in an uninhibited market place. New efforts at tracking maritime shipments to ensure penalty avoidance for activity with Iran, North Korea or Syria may create logistical headaches. Tracking a vessel’s movement typically utilizes monitoring of its AIS transponder, though pings can be fuzzied by weather and other factors. Data factors may also bump up against some privacy laws in Europe. An industry such as maritime freight is often under-reported, but important nonetheless as shipping rates can spill over to consumer prices. Michele White, the general counsel for oil tanker firm INTERTANKO, told Reuters that US restrictions may overcomplicate matters.

“This is asking private marine sector entitles effectively to do the enforcers’ job, whilst at the same time opening itself up to potential sanctions breach,” she said.