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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Is This The Beginning Of The Next Bull Run In Oil?

It will be a busy few days for the oil market, and the week started off with a bang. Oil prices shot up on Monday on news that the U.S. and China has delayed the trade war, as well as on increasing odds of deal in Vienna.

A lot of news came out of Buenos Aires over the weekend at the G20 summit. President Trump met with Xi Jingping where they hashed out a deal on trade. Or, so it seems. The White House called it a “highly successful meeting,” and Trump was quick to declare victory.

The meeting was widely hailed as a thaw in relations, with much of the press billing it as a “truce.” But the deal isn’t so much a deal as it is a delay in the trade war. The U.S. has decided to hold off on hiking tariffs on $200 billion worth of Chinese imports from 10 to 25 percent, which had been scheduled to take effect in January. China, in turn, promised to increase imports from the United States.

However, China was careful enough not to get locked into specifics. By Monday, signs that there were some misunderstandings about what the two sides agreed to quickly became apparent. Trump boasted that tariffs on U.S. autos going into China would fall from 40 percent to zero. China did not confirm that, and by all accounts, that is a concession too large for Beijing to countenance, at least at this stage.

More to the point, the same issues that have divided the U.S. and China on trade – intellectual property issues, China’s industrial policy, and more – remain. In fact, there has been very little progress on these overarching issues. For Trump, the decision to hold off on a trade escalation was borne out of political panic after the announced closure of several GM factories, growing unease from farm country, and sweeping losses in the mid-term elections. Related: Do Falling Oil Prices Help Or Hurt The U.S.?

So, the pause button allows the White House to buy some time on tariff hikes. But only 90 days. Many trade watchers find it hard to believe that Washington and Beijing can settle longstanding differences on trade in just three months, especially since there has been no discernible progress throughout 2018 amidst several rounds of tariffs, nor has there been progress over several years of on and off negotiations.

The Trump administration itself is also divided internally. The not-so-secret gulf between free-traders like Secretary of Treasury Steven Mnuchin and Larry Kudlow on the one hand, and trade adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer on the other, remains.

In fact, Trump has appointed Lighthizer to be the point person to lead the talks with China over the next few months, which makes it unlikely that the U.S. and China will simply back away from the cliff. He is very upfront about his hardline trade beliefs vis-à-vis China. There will need to either be a sweeping deal that results in major changes in trade practices, or the trade war will resume.

Nevertheless, judging by the reaction of global financial markets, Wall Street desperately wants to believe that the trade “deal” reached over the weekend was for real. Stocks soared on the news.

To be sure, the delay of the tariff increase is important, even if it is temporary. The scheduled increase of tariffs from 10 to 25 percent on Chinese goods will lessen the economic damage from Trump’s trade war. It also increases the political cost of returning to a bellicose position on trade. Trump and Xi both want to end the trade war, even if it’s hard to imagine what a resolution might look like.

Oil traders also welcomed the news. Trade protections have slowed commodity demand, and have been a major headwind to the global economy, according to the IMF. The agreement between Trump and Xi, such as it is, is positive for oil prices. Related: Oil Jumps On Trump-Xi Trade Truce

Meanwhile, in what would normally be the headline news, Russia and Saudi Arabia apparently reached a deal to cut oil production at the upcoming OPEC+ meeting in Vienna. Russian President Vladimir Putin said that Russia would go along with output curbs, although the specific levels have not been agreed to. “We have an agreement to extend our deal,” Putin said on Saturday after a meeting with Saudi Crown Prince Mohammed Bin Salman in Argentina. “There is no final decision on volumes, not yet.”

The comments suggest a deal is highly likely later this week. “While no volumes or cut were specifically mentioned, we view this as the political agreement needed for the cuts to go through and reiterate our view that such a cut in production will be agreed upon this week in Vienna,” Goldman Sachs wrote in a note.

In short, the G20 meeting in Argentina provided a lift to oil markets, even if some of the specifics still need to be hashed out.

By Nick Cunningham of Oilprice.com

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  • bobloblaw on December 03 2018 said:
    You cant make any deals with China. They always reneg
  • Vishwas on December 03 2018 said:
    Very unlikely that oil price rally can sustain when oil demand itself is falling or expected to start falling soon. There is about 6 MBD capacity that is disabled and is on the verge of reworking. Most of the oil exporting countries are bound to make hay while Sun is shining pilling the prices down. The present rallies seem to be more working of the hedge funds.
  • Vishwas on December 03 2018 said:
    Global oil surplus after home consumption is 50 MBD. Supply surplus considering EVs replacing fuel and impending restart of disabled oil productions totals about 6.9 MBD works i.e 14.7% of the exportable surplus. Oil production cut max can only a short term threat. Cannot sustain as the others will be too happy to replace it.
  • zorro6204 on December 04 2018 said:
    With the cuts seeming to be a done deal, details aside, it looks like they may be priced in, at a relatively low level. This smells like a dead cat bounce to me, I think oil wants to keep going down. And as we've seen, an over-supplied market has no bottom.
  • Bob on December 04 2018 said:
    "For Trump, the decision to hold off on a trade escalation was borne out of political panic after the announced closure of several GM factories, growing unease from farm country, and sweeping losses in the mid-term elections."

    Add also the sharp market correction in response to the threat of a cold war, along with the Feds expected tightening. That meant that the trade war could be the final straw that brings the economy down. And that before the 2020 election, the goal line for the Trumps.

    That's why there will be a resolution of some kind that will allow Trump to claim victory, but that no one believe will turn back the clock and re-industrialize the US.

    The key factor that should open the doors to a deal will almost certainly center of greater US LNG exports to China, a very comfortable concession for the Chinese.
  • Mamdouh G Salameh on December 04 2018 said:
    It could be the start of another bull run in oil. The robust global oil market fundamentals that were there when oil hit $87 a barrel in October are still with us as manifested by recent developments in the market.

    First, the so-called “truce” between China and the US is a welcome development to cool tempers and alleviate uncertainty in the global economy though it has also created confusion.

    The US and China were heading towards an end of the escalating trade war anyway because it dawned on President Trump that he can’t win a trade war with China. He didn’t really anticipate China’s response when he imposed tariffs on its exports to the United States. He thought that China will bend the knee to him. This not only didn’t happen but China retaliated blow by blow to his imposition of tariffs. Moreover, it stopped completely buying US crude oil and curtailed very significantly purchases of US LNG.

    Despite President Trump’s tough talk, his position vis-à-vis China has been weakened in recent time. The trade war is already starting to take a toll on the US economy. American farmers have been hit hard by retaliatory tariffs from China, which have tanked prices for corn and soybeans. More recently, the stock market has seen a spike in volatility, and all of the gains US stocks have seen in 2018 have been wiped out in the last few weeks. Perhaps more painful was the recent announcement from General Motors that the company was closing down five factories and laying off 14,000 people. Automakers warned that steel and aluminium tariffs would cost the industry billions of dollars. That is why a truce has been agreed on in Buenos Aires. Still, the global economy will give a huge sigh of relief.

    Second, the reported preliminary agreement between Saudi Arabia and Russia to cut production ahead of the OPEC meeting on the 6th of December in Vienna will enable OPEC to agree a cut. But who will be doing the cutting?

    The overwhelming OPEC members could be against any new cuts. Instead, they will demand that Saudi Arabia and Russia withdraw the 650,000 barrels a day (b/d) they jointly added to the market in June against OPEC members’ wishes and return them to the original 1.8 million barrels a day (mbd) cut under the OPEC/non-OPEC agreement. In so doing, the glut in the market will ease.

    Saudi Arabia will most probably end be up doing most of the cutting on its own with symbolic cut from Russia which is lukewarm about a new cut but will do a small one to show solidarity with Saudi Arabia.

    Third, Qatar’s decision to withdraw from OPEC will have no effect whatsoever on the global oil market, prices or the outcome of the December OPEC meeting.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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