U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled higher for the first time in three weeks as geopolitical events encouraged bearish traders to lighten up on the downside. Despite the higher close, the markets remained inside the previous week, suggesting investor uncertainty and indecision.
Furthermore, the price action appears to be representative of short-covering as opposed to aggressive counter-trend buying. This is understandable considering the fundamentals remain overwhelmingly bearish despite a slight shift in the narrative due to optimism over the partial trade deal between the United States and China, and heightened tensions in the Middle East.
Muted Reaction to Limited US-China Trade Deal
Crude was unpinned at the end of the week after President Trump said China and the U.S. reached the first phase of a substantial trade deal that delays tariff hikes that were to kick in this week.
Last in the session on Friday, Trump told reporters at the Oval Office that phase one of the trade deal will be written over the next three weeks.
As part of this phase, China will purchase between $40 billion and $50 billion in U.S. agricultural products. Trump also said the deal includes agreements on foreign-exchange issues with China. In exchange, the U.S. agreed to hold off on tariff hikes that were set to take effect Tuesday.
Additionally, Treasury Secretary Steven Mnuchin said both sides struck an “almost complete agreement” on currency and financial services issues. Phase two of the deal will “start almost immediately” after the first one is signed, Trump said.
Iranian Tanker Hit by Two Missiles
While the U.S.-China partial agreement grabbed most of the attention on Friday, crude oil prices were mostly affected by the news that two rockets had struck an Iranian tanker traveling through the Red Sea, according to Iranian state media.
The event didn’t lead to a notable loss of oil, but it did increase tensions in the region along with heightened concerns over supply disruptions.
OPEC Cuts Oil Demand Growth Forecast
Earlier in the week, crude oil prices were pressured after OPEC trimmed its forecast for oil demand growth for the third month in a row, citing weaker-than-expected data in the Asia Pacific region as well as advanced economies in the Americas.
In its closely-watched monthly report, OPEC cut its forecast for global oil demand growth for the remainder of this year to 0.98 million barrels per day (b/d). That’s down from its September estimate.
OPEC, Allies Consider Deeper Cuts to Output
At the same time it was announcing its forecast for lower demand, OPEC said it was considering deeper oil output cuts ahead of their December meeting.
OPEC Secretary-General Mohammed Barkindo told reports that OPEC and its allies will make “appropriate, strong, positive decisions” to sustain oil prices when they meet December 5.
“All options are open,” he said.
This news triggered the biggest and best response by crude oil traders, driving prices up 1.3%. Traders probably realized they don’t have much control over demand since a U.S.-China trade deal is out of OPEC’s hands. However, if OPEC is willing to cut once to meet demand, then they’ll be more willing to cut again in the future if the trade war continues well into 2020.
U.S. Energy Information Administration Weekly Inventories Report
The EIA reported that U.S. crude supplies climbed for a fourth week in a row, by 2.9 million barrels for the week-ended October 4. Traders were looking for a 2.4 million barrel build.
The EIA data also showed supply declines of 1.2 million barrels for gasoline and 3.9 million barrels for distillates. Traders were looking for gasoline inventory to fall by 1.2 million barrels and distillates inventory to drop by 2.5 million barrels.
This week’s report fueled a mild sell-off that was easily offset by the news that OPEC was consider further production cuts.
The announcement of the partial trade deal between the United States and China had very little influence on the market late in the session, which suggests traders aren’t too happy with the news.
The main concern is that the deal did not include erasing the current tariffs. In other words, it’s business as usual with low demand still in the picture. Furthermore, after the announcement, U.S. Trade Representative Robert Lighthizer said a decision had not been made over additional U.S. tariffs scheduled for December.
The most bullish event last week, in my opinion, was the announcement that OPEC would be considering further production cuts ahead of its December meeting. This is good news because the current production cuts are working to stabilize prices and reduce global inventory.
It’s the strongest weapon the cartel and its allies has to battle lower demand because they have no control over U.S.-China trade relations.
This article was originally posted on FX Empire
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