After starting the New Year in the red, crude oil stabilized higher today on reports that China plans to hold talks with the United States next week to settle their trade balance differences, Reuters reports.
The trade war between Washington and Beijing was one of the biggest reasons for heightened uncertainty around oil prices as China is one of the world’s top importers of the commodity and any sign that demand for it might waver immediately puts pressure on prices. Another cause for concern has been the ripple effect of the trade war on other economies.
Another reason was OPEC+’s latest agreement to cut production, which as usual led to doubts that the cartel will live up to its promise. However, judging by reports from earlier this week that Saudi Arabia had reduced its oil exports in December by half a million barrels daily, the entry into effect of the cuts on January 1 would have a positive effect on prices. The Saudi exports news immediately pushed Brent and WTI higher, albeit temporarily as concerns persisted.
These concerns have to do with the global economic growth outlooks released by a number of authoritative sources last year. All these outlooks seem to suggest that a slowdown in economic growth is ahead, which naturally depresses expectations for oil demand. Economic activity data releases from China have not helped to alleviate these worries, contributing to the losses suffered by oil.
U.S. production is the other factor everyone will be watching this year. It has been on a steady and strong rise that has sparked doubts whether OPEC+ cutting 1.2 million bpd of production would be enough to offset the U.S. output rise. Some analysts have even suggested that OPEC should cut for longer than the agreed six months to June this year if they are to prop up prices.
By Irina Slav from Oilprice.com
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The other development is the realization by the global oil market that the recent cuts by OPEC+ amounting to 1.2 million barrels a day (mbd) are going ahead and that they will most probably achieve their goal of reducing the glut in the market. This has recently been emphasized by Saudi Arabia cutting an estimated 639,000 barrels of oil a day (b/d) from its exports in December 2018 thus signalling to the global oil market its determination and that of OPEC+ to defend the oil prices.
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. Moreover, the Centre for Automotive Research earlier this year warned that US auto sales could plunge by up to two million vehicles a year over the huge tariff increase launched by Trump. That could mean a loss of about 715,000 American jobs and a $62 billion hit on US GDP.
Moreover, many of the new US LNG project proposals that are now being planned and/or receiving federal approval will have a difficult time reaching the all-important final investment decision (FID) needed to go forward without Chinese assistance. These projects not only need to sign long-term off-take agreements with Chinese entities but many of them will need Chinese financing to go ahead. Without Chinese aid, it’s likely that a significant number will fall through the cracks, and even jeopardize the US’ ability to challenge Qatar and Australia as the global LNG leader next decade.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
When in the history of oil trading has the price gone down on "hopes" of anything?
Did these trade talks between the U.S. and China taken place yet? No.
Was there an agreement? No.
So why must the world suddenly pay extremely more for the same stuff?
So that oil bulls, oil producers, and of course, hedge funds & private equity firms can profit--quickly and massively at the expense of the rest of the entire world.
FYI: WTI is already up approx. $7/bbl from its low of $42.36 and based on what? A continuous mound of bearish data. All I hear is "OPEC cutting production" and "Saudi this..." and yet the numbers continue with bearish figures from API, EIA, and Baker Hughes.
So, again, to avoid hypocrisy, let's just call it what it is: Oil bulls, producers, hedge fund managers etc. getting their ransom. Thus, in case you ever wondered, this is why so many absolutely do not care at all when prices drop because the market was never anything but tilted to the advantage of a select over-privileged few who lie, manipulate, and cheat to get a piece of everyone else's money. I for one will not stand by and be silent as a long-time oil trader and seeing this unfold before my eyes daily. Folks like myself are out there everywhere ready to call the bluff of this nonsense at any time, and at any cost.