Breakthrough In Trade Negotiations With Temporary Tariff Reduction

We have a deal. Markets around the world are off to the races Monday after a breakthrough in negotiations between the world’s 2 largest economies over the weekend led to an announcement of a 90 day reduction in most tariffs. The news seems to have surprised many after comments from both sides last week were guarded and seemed to suggest that any deals would take multiple rounds of negotiations.

Equity and energy markets in the U.S. are pointing higher by 3-4% in the early going and NYMEX futures are reaching their highest levels since the “liberation day” collapse.

Since energy supplies were already largely exempted from tariffs the day’s rally seems to be all about optimism that the looming slide in demand (AKA recession) won’t be as bad as previously expected.

One detail to watch in the coming negotiations: Used cooking oil from China has been a target of biofuel rules in both the U.S. and Europe due to accusations of fraud by using virgin palm oil and pretending it’s a recycled product. Currently Used Cooking Oil (UCO) imports do not qualify for any credit under the new Clean Fuel Producer’s Credit program even if the fuel is refined domestically and the resultant feedstock price increases has been another nail in the coffin of some biofuel producers.

Money managers continue to struggle with timing on energy contracts, with a net decrease in speculative length in oil and diesel prices reported last week of nearly 43,000 contracts just as prices were about to bounce sharply off of 4 year lows. The healthy amount of speculative shorts open in the Brent contract leave those prices susceptible to a short covering rally, which is likely contributing to those prices rising nearly $8/barrel since bottoming out a week ago. The big funds did do better with gasoline bets last week, taking profits on 18% of the short bets outstanding as prices were dipping below the $2 mark which helped them avoid being runover by the 20 cent rally we’ve seen since last Monday’s lows.

Money managers took some profits on D4 (Bio/RD) RINs last week with the speculative length outstanding seeing a small decline for the first time since February, while D6 (ethanol) RINs saw a small decrease for a 2nd straight week. Speculators made very small increases in California’s LCFS and CCA credits while Washington’s Cap & Trade credits saw a minor decline.

Baker Hughes reported a decline of 5 active oil rigs drilling in the U.S. last week while the natural gas rig count held steady. New Mexico and Louisiana led the decline with a drop of 4 and 3 rigs respectively, while the count in Texas increased by 2. The Permian basin saw a net decline of 2 rigs on the week, pushing its total to the lowest level since November 2021 at 282 active oil rigs.

Total reported an upset at its Port Arthur TX refinery Friday, which forced the facility to reduce operating rates for at least 12 hours while repairs were made to a flare gas recovery system.

Calumet reported a first quarter loss of $162 million Friday, compared to a $42 million loss a year ago. Despite the growing losses, the company is accelerating plans to increase its SAF output thanks to a $782 million loan that’s part of the federal “IRA” law, and an improvement in the processes which the company believes will significantly debottleneck the facility. The current report showed a gross profit loss of $32/barrel for SAF at its Montana Renewable facility.