U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Friday, putting both markets in a position to close higher for the week. The markets are also in a position to change the trend to up on the daily chart after posting a nearly month-long countertrend rally.
Prices Rise on Trade Deal Hopes
The catalysts behind the rally are hope for a trade deal between the United States and China and adherence to the OPEC-led plan to cut production, trim the excess global supply and stabilize prices.
Perhaps keeping a lid on prices are concerns over rising U.S. production and lower global demand.
After a mostly sideways trade earlier in the week, crude oil prices are picking up a bid on Friday in reaction to a report in The Wall Street Journal that Treasury Secretary Steven Mnuchin had floated the idea of easing tariffs on Chinese goods. This comes on top of the successful mid-level talks earlier in the month and the highly anticipated higher-level negotiations tentatively scheduled for January 30 and January 31.
At this time, the reaction to the report in the WSJ is all speculation since Treasury officials told CNBC that there is "no discussion of lifting tariffs now." Nonetheless, the story has been strong enough to drive some of the weaker shorts out of the crude oil market.
OPEC Report Provides Additional Support
The late-in-the-week rally in crude oil is also being supported by an OPEC report that showed its production fell sharply in December, relaxing some concerns over a prolonged supply glut.
OPEC's monthly report showed the cartel along with its major allies including Russia, hit the ground running a month before the official start of its plan to cut production on January 1. The report showed the biggest month-on-month output drop in almost two years.
More Support from Tightening Sanctions on Iranian Oil
Buyers are also reacting positively to a report on Friday from political risk advisory Euroasia Group, which predicted that the United States may grant waivers on sanctions it imposed on importing Iranian oil to fewer countries.
Despite the series of potentially bullish events, traders remain cautiously optimistic about the upside potential of the market primarily because of concerns over rising U.S. production. OPEC's new concerns over global demand also weighed on prices.
Energy Information Administration Raises U.S. Production Number
Earlier in the week, the EIA said American drillers pumped a record 11.9 million barrels per day in the week-ending January 11, up from 11.7 million bpd last week, which was already the highest national output in the world.
Furthermore, the Department of Energy forecasts U.S. oil production will jump from 10.9 million barrels per day in 2018 to 12.9 million bpd in 2020. Additionally, the U.S. is also expected to start exporting more crude oil and fuel than it imports in 2020.
OPEC Cuts Demand Forecast
OPEC also said in a report that it expects demand in 2019 to fall almost 1 million barrels a day less than last year as supply is expected to outweigh demand.
Conclusion
This week's reports point toward two events that will be necessary to sustain the current rally. Firstly, the U.S and China have to reach a trade agreement in a timely manner, and OPEC must continue to adhere to its strategy to limit output. This is because the U.S. is on a mission to become a net exporter while reducing its reliance on foreign oil.
Technical Analysis
Weekly Technical Analysis
(Click to enlarge)
The main trend is down according to the daily swing chart. However, March WTI crude oil futures are in a position to shift momentum to the upside on a trade through $54.98. If this move can create enough upside momentum then look for an eventual drive into a key retracement zone.
The minor trend is also down. A trade through $54.98 will change the minor trend to up. This is the move that will shift momentum higher.
The main range is $76.29 to $42.67. If the upside momentum continues then its retracement zone at $59.48 to $63.45 will become the primary upside target.
The short-term range is $42.67 to $53.61. If the buying pressure dries up then look for a pullback into its retracement zone at $48.14 to $46.85. This is the short-term value zone. If buyers fail to chase this market higher then look for a pullback into this zone. If this market is going to move higher then aggressive counter-trend buyers will have to come in on a test of this move. Otherwise, the selling pressure will continue.
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Comments
To facilitate ending the trade war, the United States has so far made two concessions to China. The first one is when US Treasury Secretary Steven Mnuchin declared in November last year that China has not actually been manipulating the value of the yuan to achieve trade benefits at the expense of the US, one of two claims made by President Trump to justify imposing tariffs on Chinese exports to the US. The other is a recent report in the Wall Street Journal that Treasury Secretary Mnuchin had floated the idea of easing tariffs on Chinese goods.
The second bullish factor is that the OPEC+ production cuts are starting to permeate the global oil market and impact on prices. Saudi Arabia and OPEC are determined to ensure that the cuts will do the trick and reduce the glut in the market. Russia is also determined to stick to the cuts but at its own pace.
A third factor is that the global oil market fundamentals are robust enough in terms of a global economy projected to grow at 3.7%-3.8% in 2019, a global demand for oil projected to add 1.4 million barrels a day (mbd) this year over 2018 and China’s rising oil imports projected to hit 11 mbd this year having reached 10.31 mbd last year, to support an oil price of $80 a barrel or higher this year.
Still, there will be one bullish element at play this year. It is the realization by the global oil market that US sanctions have so far failed to cost Iranian crude oil exports the loss of even a single barrel of oil thus discounting the possibility a supply deficit.
Furthermore, The United States has no alternative but to renew the sanction waivers it granted to eight countries in November last year when they expire in May this year or issue new ones.
There are two important reasons for that. The first is for the Trump administration to use them as a fig leaf to mask the fact that their zero exports option is out of reach and that the sanctions are doomed to fail.
The second reason is that the United States risks exposing its weakness and helplessness in enforcing the sanctions were it not to renew the waivers in May or fail to issue new ones. The eight countries who received waivers in November with the exception of South Korea and Japan will not stop buying Iranian crude if the waivers were not renewed and the US has no power to force them to stop.
Claims about explosive growth in US oil production have been discounted by the global oil market as hype, hence their limited influence on keeping a lid on prices.
Indications of a slowdown in US shale oil production are coming fast and thick from various sources and yet the EIA is still hyping about US oil production rising this year to 12.1 mbd from 10.9 mbd in 2018.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
This made U.S. auto companies decide to drop car production and focus on those selling. When the market becomes saturated with the low mileage products, Wham, now the U.S. economy is dead in the water because no backup plan or car production line up. Just like what was done in Aug2005-Feb2015, fuel spiked to near $4 per gallon for that 10 year span and the U.S. economy stalled and had a hard recovery.
Yet U.S. experts are dumbfounded as to what the hell happened!!!
It was called and titled "the perfect storm" by many who planned it!!!