U.S. West Texas Intermediate and International-benchmark Brent crude oil futures are trading higher on Friday after a steep sell-off the past two sessions. The markets are trading inside Thursday's range which suggests investor indecision and impending volatility. It could also be suggesting that traders are transitioning for a counter-trend move. Nonetheless, U.S. and Brent crude are both in positions to post a second week of losses.
China Enters the Picture
The focus for investors late in the week shifted to U.S.-China relations and the on-going Sino-U.S. trade war. Despite the early strength, gains are still being limited by concerns that these events are hurting overall economic activity.
Early Friday, domestic government data showed refinery throughput in China, the world's second-largest oil importer, rose to a record high of 12.49 million barrels per day (bpd) in September as some independent plants restarted operations after prolonged shutdowns over summer to shore up inventories.
However, the report also showed that refinery consumption may rise through the fourth quarter as several state-owned Chinese refiners return to service after maintenance.
On the bearish demand side, China also reported on Friday its weakest economic growth since 2009 in the third quarter, with gross domestic product expanding by only 6.5 percent, coming in below estimates.
Looking ahead, the weak GDP data raised concerns that the country's trade war with the United States is beginning to have an impact on growth, which may limit China's oil demand.
Despite Friday's early rebound rally, the data this week has been bearish so we're not expecting too much of a reversal to the upside. Putting the most downside pressure on prices this week has been the bearish EIA Weekly Petroleum Status Report.
U.S. Energy Information Administration (EIA) Report
According to the U.S. Energy Information Administration, U.S. crude stocks rose 6.5 million barrels during the week-ending October 12, the fourth straight weekly build. Traders were looking for a 1.6 million barrel build.
Inventories rose sharply even as U.S. crude production fell 300,000 bpd to 10.9 million bpd last week. Analysts said the drop was attributed to the effects of offshore facilities closing temporarily for Hurricane Michael.
Gasoline stockpiles fell by 2 million barrels last week, while distillate stockpiles declined by 800,000 barrels, according to the EIA. Forecasts called for a drop of 1.52 million barrels in gasoline and 1.5 million barrels for distillates.
Saudi Arabia's Problems Worsen
Oil traders are also continuing to monitor developments over the death of a prominent Saudi journalist. According to CNBC, U.S. President Trump gave Saudi Arabia the benefit of the doubt in the disappearance and apparent death of journalist Jamal Khashoggi even as U.S. lawmakers pointed the finger at the Saudi leadership and Western pressure mounted on Riyadh to provide answers.
The outcome of an investigation could lead to U.S. sanctions against Saudi Arabia, but Saudi officials have also promised retaliation if sanctions are pursued. This may mean a cut in production, which should be bullish for prices. Some traders are speculating Saudi Arabia could cut as much as 500,000 barrels per day of crude production in response to any U.S. sanctions. Related: What Killed The Oil Price Rally?
In the meantime, the Saudi's tried to deflect the negative news by talking up its role in preventing a worldwide oil shortage following the start of the sanctions against Iran on November 4. In an attempt to prevent a speculative rally and keep prices under control, Saudi Arabia assured OPEC that it is "committed, capable and willing" to ensure there will be no shortage in the oil market, OPEC's secretary-general said.
In other news, Saudi Arabia and Kuwait are expected to struggle to resume oil production from jointly operated fields that produced some 500,000 bpd any time soon due to operational differences and souring political ties, CNBC sources said on Wednesday.
Additionally, the West is trying to put financial pressure on the Saudi's amid growing controversy over Khashoggi by pulling out of its major investment conference. On Wednesday, the managing direction of the International Monetary Fund and the heads of two major French banks said they would not attend the conference. On Thursday, Treasury Secretary Steven Mnuchin announced that he will not participate in the high-profile conference.
Technical Analysis
Weekly December West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The chart pattern is fairly simple for December WTI crude oil. While the daily chart is showing volatility, the weekly chart is revealing an orderly break into a potential value area. Looking at another time period other than the daily chart tends to strip out the volatility and the emotion to get a clearer picture about the actual price action. Related: U.S-Saudi Clash Could Spell Disaster For OPEC
Despite two weeks of weakness, the main trend is still up. A trade through $76.72 will signal a resumption of the uptrend. A move through $63.48 will change the main trend to down.
The minor trend is also up. A trade through $66.50 will change the minor trend to down. This will also shift momentum to the downside.
The main range is $63.48 to $76.72. Its retracement zone is $70.10 to $68.54. The market is currently trading inside this zone. Trader reaction to the area will determine the near-term direction of the market.
Forecast
While we can't control the continuing headlines - both bullish and bearish - we can read the chart pattern and it is indicating that investors have been stripping out speculation and looking for value. The value zone is $70.10 to $68.54.
Based on this week's price action, the direction of the December WTI crude oil market next week will likely be determined by trader reaction to $68.54.
A sustained move over $68.54 will indicate buyers are coming in to defend the uptrend. Overtaking $70.10 will signal that the buying is getting stronger. If this move creates enough upside momentum then we could see a rebound rally into at least $72.63 next week. A test of this level will determine if prices continue to move higher, or if the market becomes rangebound.
A sustained move under $68.54 will signal the presence of sellers. They are going to go after the minor bottom at $66.50 in an effort to shift momentum to the downside.
By Jim Hyerczyk for Oilprice.com
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Comments
The escalating trade war between the US and China may hardly impact on global oil prices. If China was hindered by rising US tariffs from selling $800-billion worth of goods annually in the US, it can sell them somewhere else as its economy is far more integrated than the US economy in the global trade system supported by its silk and belt road initiative.
The US on the other hand may have to replace Chinese imports with more expensive imports from elsewhere. This will lead to rising costs for US customers, higher inflation, widening budget deficit and rising outstanding debts by at least 2.35%. In other words, the US will be the eventual loser in a full trade war with China.
Still, China’s economy is projected to grow this year by 6.6%, double that of the United States’ and still phenomenal for a mature economy like China’s. Even a projected 6.2% growth next year is a very respectable growth.
The other pivotal indicator is that total oil demand in China will rise this year to 13.32 million barrels a day (mbd), an increase of 525,000 barrels a day (b/d) or a 4.2% increase over last year necessitating oil imports exceeding 10 mbd. It is also projected to rise by 3.5% or 465,000 b/d in 2019 to 13.79 mbd.
China will continue for the foreseeable future to be the major mover behind both global economic growth and global oil demand.
However, there is a glimmer of hope that the meeting in November between President Trump and Chinese President Xi Jingping could lead to breakthrough ending the escalating trade war between their countries.
The first crack in the US armour has appeared when the US Treasury concluded that China has not been manipulating its currency to benefit from trade with the United States. This is one of two accusations President Trump used when he imposed tariffs on Chinese exports. The other is the huge trade surplus China enjoys with the US.
It is, therefore, no coincidence that the Trump/Jingping meeting comes at the time US sanctions against Iran go into effect. If no breakthrough is reached then, the trade war between them could be expected to escalate further. China could nullify US sanctions altogether by importing the total Iranian oil exports amounting to 2.2 mbd and paying for them in petro-yuan. Moreover, the petro-yuan has made the US sanctions useless and has provided a way by which Iran could bypass the petrodollar and the sanctions altogether.
I have repeatedly argued that sooner or later President Trump will realize the futility of his escalating trade war against China. It is a war he can’t win. He will eventually be forced to cut his losses by bringing to an end his trade war with China.
Oil prices trended slightly lower this week despite rising tension between the United States and Saudi Arabia over the murder of the Saudi journalist Jamal Khashoggi at the Saudi consulate in Istanbul. And though there were harsh words from President Trump threatening Saudi Arabia with severe punishment, no clash between the two countries is expected and business will soon be back as usual. Therefore, the impact on global oil prices will hardly register on the radar of the global oil market unless President Trump does mete a severe punishment on Saudi Arabia.
Were this to happen, Saudi Arabia will retaliate forcefully against any US punishment on it. By cutting its oil production drastically, it could push oil prices far above $100 a barrel and accelerate the use of the petro-yuan for its oil exports, something that is going to happen anyway. The biggest casualty could be President Trump’s Republican Party in the mid-term Congressional elections in November. Another measure is that the Saudis could refuse to compensate for any possible loss by Iran oil exports resulting from US sanctions though I am on record having been saying for the last ten months that US sanctions against Iran are doomed to fail miserably and Iran will not lose a single barrel from its oil exports.
This is no bluster. Certainly President Trump took the Saudi threat seriously enough to start back tracking on his threat of severe punishment on Saudi Arabia.
President Trump stopped short of threatening the cancellation of US arms sales to Saudi Arabia estimated at more than $100 bn annually because he knows that these could easily be replaced by Russian arms which are as sophisticated as US arms and cheaper.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London