A long time ago, in a galaxy far, far away…thousands of nerds like me wouldn’t line up days in advance just to see a movie. But, such is the genius of the Star Wars! By this point in human history, even the most casual Star Wars fan gets at least a hint of gratification on this very special day. And, since May isn’t internationally famous for much else, this month’s Market Watch pays homage to one of the great movie franchises in this galaxy…and maybe others.
May 5 – Cinco de Mayo
With the 5th of May upon us, it may be instructive to start with what Cinco de Mayo isn’t. It is not Mexico’s Independence Day and it doesn’t involve a victory over Spain. On the contrary, Cinco de Mayo commemorates the unlikely victory won by Mexican soldiers at the battle of Puebla against the French army in 1862.
Today though, Cinco de Mayo primarily celebrates Mexican-American culture and reflects on the ties between the two countries.
In terms of economics, this year’s conversation is likely to involve NAFTA, with the future of the free trade agreement in doubt as President Trump seeks an altered framework. While trade between the U.S. and Mexico impacts countless sectors within each nation’s economy, energy sits near the top of the list. The U.S.-Mexico border has a long history of bi-directional energy trade that has seen steady flows of crude, refined products, and natural gas change hands. Historically, that trade has been skewed heavily in one direction – with Mexico sending large volumes of raw crude to be processed at U.S. refineries.
However, in the wake of the U.S. shale boom and the end of a U.S. oil export ban, that trend has reversed. The U.S. has been a net energy exporter to Mexico in recent years. As we look ahead, the nature of U.S.-Mexico energy trade will continue to demand the market’s attention, particularly with Mexico as an important source of demand growth for U.S. natural gas, diesel and gasoline.
May 12 – Deadline for U.S. Decision on Iranian Nuclear Deal
Not all energy dates are created equal. This month, May 12th stands alone. That’s the date when President Trump will have to decide (at least for now) where the U.S. stands in relation to the Iranian nuclear deal. While France’s Emmanuel Macron and Germany’s Angela Merkel have lobbied Trump to maintain the U.S.’s commitment, Trump’s own comments show limited interest in sticking around. If it backs away, a U.S. exit would mark a victory for those who prefer a hardline response to Iran’s increasingly destabilizing influence in countries like Syria and Yemen, but it may prove tougher to swallow for those focused on prices at the pump.
The reason? After Iran agreed to give up its nuclear weapons program in exchange for sanctions relief at the start of 2016, Iran then added ~1 million barrels per day of new oil production. With the U.S. likely moving to reinstate some of those sanctions, that production is in jeopardy. (With India and the EU already among those signaling continued commitment to the deal, Iran won’t necessarily see the global market shun their oil exports overnight.) Nonetheless, the U.S. has a number of avenues to pressure other countries to avoid trade with Iran. If it chooses to use them, Iranian oil could see steady declines, which would spur rising oil prices even further.
May 14 – OPEC Oil Market Report
Speaking of rising oil prices… An ongoing deal to cut supply between OPEC and a number of non-OPEC countries (mainly Russia) has been a driving force behind steady declines to global inventories of crude and refined products in storage. A multi-year glut has essentially been erased and oil prices have more than doubled from the lows of two years earlier. Still, OPEC has yet to declare mission accomplished, opting instead for defining success according to a revolving set of moving targets.
As prices have moved higher, so have price targets for several OPEC member countries, which leave the market to wonder when (or if) the cartel will actually claim victory. Ahead of June’s formal meeting, OPEC’s official market report on May 14th may be the best place to look for answers – something that’s especially important as speculation builds that current prices will weigh heavy on summer driving demand.
To that end, don’t expect OPEC’s oil-heavy economies to grow tired of higher oil prices until consumers start canceling summer road trips.
Contributed By: Robbie Fraser, Commodity Analyst, Schneider Electric Energy & Sustainability Services