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Energy Markets Watch: Energy Independence Edition

Contributed By: Robbie Fraser, Commodity Analyst | Schneider Electric Energy & Sustainability Services

July’s Markets Watch effortlessly combines energy and independence into a combustible mixture designed for a series of well-choreographed, controlled explosions. The figurative fireworks begin with back-to-back official OPEC+ meetings and are followed closely by literal fireworks and Independence Day in the US. The highly anticipated finale arrives on July 31 with the Fed’s decision on interest rates. For all the reasons outlined below, each of these events is sure to affect energy markets to one degree or another, likely somewhere between a fizzle and a bang.

July 1-2: Official OPEC+ Meetings

July isn’t wasting any time offering up market-shaking energy events as OPEC+ coalition countries kicked things off with their highly anticipated meeting in Vienna. With Saudi Arabia and Russia serving as de facto leaders, the group accounts for ~45 percent of total global production. Given those figures, it’s easy to see why markets pay close attention to their next major strategy meeting.

However, this meeting didn’t bring as much uncertainty as previous editions, with consensus building for extending current production cuts through the end of the year. While that’s supportive for prices, it’s also a response to the current deal’s ineffectiveness as the market showed consistent signs of oversupply for most of Q2. In the meantime, geopolitical tensions remain high, even by OPEC standards, with Saudi-Iran relations even worse than usual and Russia caught awkwardly in the middle.

July 4th: U.S. Independence Day

While the idea of American energy independence has been a political talking point for generations, America heads into its 243rd Independence Day closer than ever to making that idea a reality.  For energy sources such as natural gas and propane, the U.S. has already switched from net importer to one of the world’s leading net exporters.

More impressive still is the evolution of crude and product trade. In 2010, the U.S. was a net importer by more than 10 million barrels per day. Fast forward past a historic shale boom to the present day, and government figures in June’s final weekly report showed the U.S. as a net exporter by nearly 700,000 barrels per day.

That said, true energy independence involves much more than exporting more than you import.  For starters, the U.S. still remains the world’s second largest importer of crude behind China, which might lead one to question why the U.S. is simultaneously exporting millions of barrels of domestic production to the other side of the world. As strange as it may seem on the surface, there’s a logical explanation: it hinges on the huge variety of crude types that fall under the broad umbrella of “oil.”

U.S. shale produces “light, sweet” oil, but U.S. refiners still need large volumes “heavy” crude from Canada, Mexico, or the Middle East. Even more important, though, crude and other energy commodities exist within a global marketplace, meaning it’s impossible to be truly insulated from the actions of foreign actors (read: OPEC) so long as free trade exists.

Nonetheless, the surge in U.S. energy production has greatly reduced OPEC’s power and allowed the U.S. to emerge as a major driver of global prices. Something to keep in mind this 4th of July while enjoying a decidedly dependent commodity – 99% of America’s fireworks still come from foreign imports.

July 31: Fed Interest Rate Decision

Everyone knows it’s important, few know how it really operates, and President Trump has become a frequent Twitter critic.

While acceptable answers may include “the FBI” or “Big Tech”, July’s final date to watch centers on the U.S. Federal Reserve.

In recent months, President Trump has repeatedly called for lower interest rates. Despite the unprecedented criticism, the Fed hasn’t budged. However, after slowly raising rates in recent years, last month’s Fed meeting had offered some clear indications that a rate cut is likely coming later this year. Interest rate decisions can be notoriously complicated in their justification, but their impact is a bit more straightforward.  All else equal, a move to lower rates by the Fed would weaken the U.S. dollar relative to foreign currencies, and boost dollar-denominated prices ranging from the Dow Jones to a barrel of crude.

While it does look like rate cuts are on the 2019 agenda, most market expectations still see rates staying unchanged for July, with the first rate cut coming at the following meeting in mid-September. Those expectations still carry plenty of uncertainty at this stage, though. The July decision is sure to have immediate impact on energy prices and markets at large.

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