U.S. West Texas Intermediate and international-benchmark crude oil futures finished the week higher, primarily led by increased demand for higher-risk assets. The catalysts behind the move were confirmation of trade talks between the United States and China, a robust U.S. jobs report and dovish remarks from Fed Chair Powell. All three events eased some fears of a global economic slowdown. Gains were capped, however, by an unexpected rise in refined product inventories, according to a government report.
Weak Manufacturing Data Raises Concerns Over Demand
Crude oil was under pressure early in week after economic data from China and the U.S. signaled a potential slowdown in the world’s two largest economies. In the U.S., the ISM Manufacturing PMI came in at 54.1, well below the 57.5 consensus and November’s 59.3, driven by the new orders subindex which slumped to 51.1 from 62.1. The drop in the main index closely mirrors the sharp weakness recently seen in the equivalent China PMI import sub-index.
OPEC Production Cuts Begin
OPEC and its allies including Russia, agreed in December to reduce output by 1.2 million barrels per day (bpd) in 2019 versus October 2018 levels. This is supposed to trim the excessive global supply and stabilize prices. However, it’s going to take time. Traders feel that if OPEC can stay true to the deal, the global supply glut could be cleaned up within 3 to 4 months.
Reuters reported on Thursday that OPEC is already making moves to fix the situation. According to a survey, OPEC oil supply fell by 460,000 barrels per day (bpd) between November and December, to 32.68 million bpd. Top exporter Saudi Arabia made an early start to a supply-limiting accord, while Iran and Libya posted involuntary declines.
U.S.-China Trade Talks Reach New Level
China’s commerce ministry said that it would hold vice-ministerial level trade talks with U.S. counterparts in Beijing on January 7-8. Given the recent string of weak economic data from both countries, it seems there would be a sense of urgency to reach an agreement before there is a global recession. Traders are hoping for a new trade deal by March 1. An earlier than expected deal will be bullish for crude oil.
U.S. Non-Farm Payrolls
This report is important to crude oil because it represents growth in the economy. December’s solid report numbers suggest financial market traders may have it all wrong and that the economy is not headed toward a recession. The numbers actually suggest the economy still has considerable forward momentum and this may bode well for future crude oil demand.
Federal Reserve Chair Powell Turns Dovish
On Friday, Fed Chair Jerome Powell made dovish remarks about monetary policy that launched a huge stock market rally while weakening the U.S. Dollar. Renewed demand for higher-risk assets could help support crude oil prices over the near-term. A weaker U.S. Dollar will make crude oil cheaper for foreign buyers. This could help drive up demand.
U.S. energy firms reduced oil rigs for the first time in three weeks as producers began to shrink their 2019 drilling plans due to the collapse in crude oil prices during the last quarter of the year. According to General Electric’s Baker Hughes energy services firm, drillers cut eight oil rigs in the week to January 4.
Last week, traders primarily ignored the huge build in refined product inventories which strongly suggests the near-term focus will remain on increased demand for risky assets. Crude oil will rise this week if investors continue to push stock prices higher.
Traders will also be looking for signs of a reduction in output in light of the start of the OPEC-led production cuts. The cut in U.S. drilling rigs is also a potentially bullish development. This combined with Saudi Arabia’s vow to cut exports to the U.S. could lead to a reduction in U.S. supply.
Traders are watching gasoline inventories which are extremely high. However, this situation may not have a lasting effect. Negative developments over U.S.-China trade talks could also put a lid on the rally.
Sentiment appears to have shifted to the bullish side so we’re looking for the rally to continue unless U.S.-China trade talks mysteriously collapse. Aggressive counter-trend buyers are currently probing for price levels that will scare some of the weaker shorts out of the market. We’d also like to see the CFTC data start to show that the hedge funds are lightening up on the short side.
This article was originally posted on FX Empire