Trump Impeachment Trial Nears Its End Game

Opinions and positions die hard on Capitol Hill. So, after eight gruelling and mostly long days of the Senate impeachment trial of President Trump, few if any minds among the senators – and probably the public as well – have changed.

Day after day, lawmakers of both parties continue to recite the same talking points, the same positions, the same partisan rhetoric as they did on the trial’s opening day a week ago Tuesday. Continue reading “Trump Impeachment Trial Nears Its End Game”

Oil Sinks on Mounting Coronavirus Fears

The Chinese coronavirus isn’t just a public health crisis. It’s also a major threat to commodities markets, given that China is the world’s biggest consumer of most industrial materials. That’s especially true for oil, the price of which is sinking fast as fears of a possible pandemic mount.

At this point, it’s too soon to say just how serious the current outbreak will turn out to be. And thus, it’s too soon to know exactly how much it will affect global oil markets. But traders are clearly nervous. Benchmark West Texas Intermediate crude has fallen from about $58 per barrel last week to $53 now, as it became clearer that the mystery virus has spread faster than Chinese officials had previously admitted.

It’s not hard to see why oil prices are tanking. China is the world’s largest importer of crude and refined products. Its massive economy consumes about 14 million barrels of petroleum per day, according to the International Energy Agency. That puts China second only to the U.S., at roughly 20 million barrels per day. (And unlike China, the U.S. can largely meet its needs from domestic supply thanks to the fracking revolution.) What’s more, China is a major source of new demand in the global oil market. Last month, the IEA noted that developing economies are now driving global demand higher as mature economies start to burn less petroleum. China is at the forefront of that trend.

Bans on travel already cover more than 50 million people in China. If those restrictions spread, the hit to oil demand will get even worse. Meanwhile, there’s the risk that international air travel could suffer as more cases pop up outside China and other countries seek to keep out infected travelers. As of 2017, global jet fuel consumption accounted for nearly 7% of total oil demand, according to the Department of Energy.

Presumably, China isn’t going to shut down all internal travel. And international air travel isn’t coming to a complete halt. But any long-lasting drop in these sources of demand would likely be enough to measurably lower oil prices.

Not nearly enough is known at this point to forecast how prices will respond to the virus. But I think a few different scenarios can be sketched out. If authorities in China and elsewhere can get the disease under control quickly, the impact on oil demand should be modest and prices should rebound to their previous levels fairly quickly. If the number of infections and deaths continue to grow rapidly, demand figures to suffer badly, and WTI could sink below $50 per barrel. That would mean even more pain for energy companies already reeling from rock-bottom natural gas prices. A scenario somewhere in the middle, with infections spreading but not fast enough to trigger major travel and shipping shutdowns, would likely keep oil prices somewhat depressed. In that scenario, I would look for WTI to trade somewhere near $55 per barrel until the crisis passes.

In the longer term, I expect oil prices to gradually head higher. OPEC continues to limit its production, and there are rumors that the cartel will institute steeper cuts if Chinese oil demand shrinks significantly. Fighting in Libya has crimped that country’s production. Energy companies in the U.S. are cutting back on drilling new wells. And the recent armistice in the U.S.-China trade war should give the global economy a modest boost. All of those factors point to lower supply or stronger demand, which in turn should support prices. But until the specter of the coronavirus is removed, none of those factors is likely to matter.

Natural Gas: How Low Can It Go?

The price of natural gas has slumped to a four-year low. And it shows little sign of recovering anytime soon.

How cheap are we talking? Gas futures recently traded at $1.90 per million British thermal units, versus about $3 per MMBtu at this time last year. Prior to the ramp up in domestic production unleashed by hydraulic fracturing, gas routinely traded above $5 or even $10 per MMBtu. (And that’s not accounting for inflation.)

U.S. gas consumption is higher than ever, thanks to strong demand from gas-burning power plants as utilities shut down coal-fired plants. And energy companies are exporting a record amount of the stuff, both via pipelines to Mexico and in liquefied form to buyers all over the world. Yet all that demand hasn’t been enough to prevent an epic price rout, because gas production has grown even faster.

Why do energy companies keep producing more gas when its price keeps dropping? In many cases, they can’t help it. A sizable portion of America’s gas output is the byproduct of oil wells in places like the Permian Basin of Texas and New Mexico. Gas that comes up with the oil is routinely sold off for cheap, if not simply burned off at the well site. And although oil drilling activity has declined lately because of cheaper crude, it’s still going fairly strong.

Much of the recent gas price decline owes to unseasonably warm weather across large swaths of the U.S., which has kept heating demand lower than normal. Stockpiles of gas in underground storage are high for this time of year, and weather forecasts aren’t showing any severe cold outbreaks powerful enough to put a dent in those supplies. Spring isn’t far away, which means the current glut could grow even worse if the current warm trend doesn’t end soon. Plus winter is proving relatively mild in other big gas markets, such as Europe and Asia. So international benchmark prices for liquefied natural gas are also falling. Hence the U.S. price sell-off, say analysts at S&P Global Platts.

All of this is bad news for gas producers, from the diversified oil and gas “majors” such as ExxonMobil and Chevron, to more gas-focused companies, such as Antero Resources and EQT. Exxon, in its third-quarter earnings call, noted that “natural gas prices…remained challenged by market imbalances.” That’s putting it mildly. No wonder that the shares of energy companies have lagged so badly behind most of the rest of the stock market lately.

Of course, gas producers’ pain is consumers’ gain. But it depends on which consumers you’re talking about. According to data from the Department of Energy, commercial and industrial customers mostly paid less for gas in 2019 than they did during the comparable periods of 2018. (The DOE hasn’t tabulated full-year price data yet.) Ditto for electric utilities, even as gas-fired power plants continue to displace coal plants. But residential customers haven’t been benefiting yet. Through the first 10 months of 2019, the average residential price was a tad higher than it was a year earlier.

Natural gas prices are notoriously volatile in the short term. In the long term, it seems reasonable to believe that rising domestic consumption plus growing exports should bring demand into better balance with supply, giving prices a boost. But investors looking for a sustained price rebound are probably in for a long wait.

Senate Goes Back To Middle School For Impeachment Trial

There are a lot of similarities between the Senate and middle school. The inhabitants of both sit at small, cramped desks; both have a heightened sense of self-importance; and both aren’t afraid to bend (or break) the rules if they think they can get away with it.

Case in point: During the Senate impeachment trial of President Trump, senators are supposed to adhere to a rather strict set of rules meant to keep the decorum of “the world’s greatest deliberative body” intact while allowing the proceedings on the floor to run smoothly. The rules, most of which don’t apply when the Senate is in normal session, require senators to remain seated and silent during the trial. Electronic devices, including cell phones, laptops and tablets, are prohibited inside the chamber. And senators are not allowed to eat or drink anything but water when the trial is in session. The one exception is milk (yes, milk). Continue reading “Senate Goes Back To Middle School For Impeachment Trial”

New Trade Deals Give Trump a Political Boost Amid Impeachment Turmoil

While impeachment dominated the headlines this week, there was also plenty of big news on the trade front, most notably the long-awaited signing of the Trump administration’s “phase one” trade deal with China.

So what’s in the deal? Plenty of ink has been spilled about China’s commitment to purchase an additional $200 billion of U.S. goods and services over the next two years. For reference, U.S. exports to China totaled $185 billion in 2017, the baseline year, meaning that they would have to increase a whopping 54% in 2020 to keep pace.

Continue reading “New Trade Deals Give Trump a Political Boost Amid Impeachment Turmoil”

What To Expect From The Looming Senate Impeachment Trial

The impeachment of President Trump is about to enter a new, historic phase. Beginning next week, a president will be forced to defend himself at an impeachment trial for only the third time in U.S. history.

After Democrats initiated impeachment in the House, it’s now the Republicans’ turn in the Senate. Barring some extraordinary new evidence or developments, Trump is almost certain to be acquitted by the GOP-run upper chamber. But that doesn’t mean the trial won’t be filled with drama and potentially damaging consequences for one party or the other, or both. Continue reading “What To Expect From The Looming Senate Impeachment Trial”

Congress, The Big Tent Circus

The two “I” words completely dominated Capitol Hill this week – Iran and impeachment. And in typical congressional fashion, lawmakers have no clear path or consensus for dealing with either. So just when you thought the three-ring circus that is Congress couldn’t get any crazier, more confusing or more conflicting, it just did. If the first week of the new year is any indication of how the rest of 2020 will go in Washington, buckle up.

Let’s take Iran first. President Trump’s decision to kill Iranian Gen. Qassem Soleimani via drone strike near Baghdad sparked intense debate in Congress. No tears were shed on Capitol Hill over the slaying of Iran’s top military commander, as Soleimani was responsible for the deaths of hundreds of Americans. But many in Congress – mostly Democrats but also a handful of Republicans – are troubled by the president’s penchant for carrying out military actions without their OK, or even their consultation. Trump bypassed longstanding protocol when he launched the attack without first giving Congress a heads-up, adding to many lawmakers’ frustrations that the White House is usurping legislative branch authority. Continue reading “Congress, The Big Tent Circus”

Oil Markets Muted in Wake of Soleimani Assassination

In an earlier era, the risk of war between the U.S. and Iran would likely have sent oil prices skyrocketing, resulting in significant financial pain for consumers and a serious hit to the U.S. economy. But when news broke late last week that the U.S. had assassinated a top Iranian general in Iraq by drone strike, oil prices rose a fairly modest 3%. Today, they’re largely flat.

Why? In a word: Fracking, or hydraulic fracturing, the drilling technique that, combined with horizontal drilling and other tech advances, has unlocked more oil in more places across America. The Middle East is still a crucial source of supply for global markets, but thanks to the resurgence in domestic production, the U.S. is now largely self-sufficient in petroleum. In fact, we now export more crude oil and refined fuels than we import, according to the Department of Energy. (It also helps that our biggest source of imported crude oil by far is Canada. Saudi Arabia ranks a distant third.)

There’s no telling what comes next in the slowly intensifying confrontation between Washington and Tehran. But I think we can identify a couple of outcomes that won’t happen: Violence in the Persian Gulf region won’t result in physical shortages that require American drivers to queue up at gas stations the way they did during oil crises in the 1970s. And oil prices won’t climb high enough to do the U.S. economy any real damage, again unlike in the 70s, when oil price shocks helped stoke double-digit inflation and two recessions.

Since 2005, when U.S. crude production fell to a multidecade low of 5 million barrels per day, output has steadily climbed to today’s nearly 13 million barrels. Energy companies are also producing a bounty of other liquid hydrocarbons, such as ethane and propane, plus about 1 million barrels per day of ethanol. Add it up, and U.S. output roughly equals consumption. Less than a decade ago, the country depended on 10 million barrels per day of imported crude and refined fuels.

Of course, even with all that production, America isn’t independent of global energy markets. Supply disruptions on the other side of the world still affect prices here. And the Persian Gulf is a key chokepoint for the oil market. The tankers transiting its waters carry roughly a fifth of the world’s petroleum supplies, according to the DOE. A full-blown shooting war there would seriously crimp those volumes and likely lead to a significant price increase.

Yet so far, the Soleimani killing and resulting rhetoric from Iran has only caused benchmark West Texas Intermediate crude to rise by about $2, to $63 per barrel in recent trading. Retail gas prices have not yet registered any of that increase, though they probably will rise by several cents a gallon later this week.

For now, it appears that oil traders are betting that something less than World War III is imminent in the Gulf, and that global oil supplies aren’t in serious danger. Given the added production that fracking has brought to market in recent years, that seems like a good bet.

It also helps that the U.S. economy is less exposed to oil price spikes than it used to be. During the 1970s crises, say economists at Wells Fargo, “gasoline and other energy goods” made up 4% of American consumers’ spending. Today that figure is now 2%, thanks in part to significant increases in the gas mileage of modern vehicles. So oil prices would have to really soar to have the same macroeconomic effect that they did four decades ago.

Ringing in 2020 With Mixed News on Energy Prices

When it comes to your energy bills, 2020 is arriving with good news and bad news. Drivers are in for higher prices at the pump, but it should cost most folks less to heat their homes this winter.

Per travel website AAA, the national average price of regular unleaded gas now stands at $2.59 per gallon. That’s not too painful when you think back to the days of $3 gas that prevailed up until 2014 (unless you live in a state like California, where prices average about a buck higher than the nation as a whole). Still, today’s average is about 25 cents higher than it was at the beginning of 2019. Given that crude oil prices are higher than they were a year ago, that’s not surprising. And unfortunately, odds are good that the price at the pump is only going to trend up as winter turns to spring.

In each of the past several years, retail gas prices have tended to bottom out around Christmas or early in the new year and then drift higher, often peaking in the late spring or early summer. That makes sense, given that Americans tend to drive less during the depths of winter and then hit the road for spring and summer vacations. Plus, refiners start to switch over to summer-blend gasoline formulations in advance of warm weather, which adds a bit to the final cost.

A big drop in oil prices could buck that pattern this year. But with energy firms paring back their oil drilling in the U.S. to improve financial results, and OPEC committed to keeping a lid on its exports, a big drop in crude doesn’t look likely at the moment. If the U.S. and China can make more progress on patching up their trade fight, oil could even creep a bit higher as traders bet on a stronger global economy.

In the near term, the bump in oil prices resulting from the U.S. strikes that killed a prominent Iranian general in Iraq will push gas prices a bit higher. Unless the Iranians retaliate in such a way that makes full-blown war a realistic threat, I expect oil prices to ease after a few days or a week. Still, it’s one more reason to expect fuel prices to trend up.

In fact, 2020 may be the year the national average price returns to the psychologically important $3 mark for the first time since October of 2014. (It came close in May of 2018, but topped out around $2.96.)

So budget more for road trips. But most consumers should see lower heating bills.

Per the Department of Energy, retail propane prices are running more than 40 cents per gallon less now than a year ago. Heating oil: Down 7 cents. Price data for residential natural gas deliveries aren’t available yet, but gas futures contracts are down substantially from their level of one year ago, so at least some gas customers ought to catch a break on rates.

Long-range weather forecasts are notoriously difficult, but for what it’s worth, the National Weather Service’s Climate Prediction Center sees most of the country experiencing normal to above-average temperatures this winter, versus a relatively small swath of the upper Midwest that is more likely to be below average. If that forecast pans out, and heating fuel prices don’t spike, most households should see some savings on their utility bills to balance out the higher cost of filling up their gas tanks.