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Trade deal boost tapering off for crude oil market

Oil traded on a positive note last week, as easing US-China trade concerns fuelled bullish sentiment in the market. Prices have been rising since early December when the Opec and allied producers pledged deeper output cuts.

China reported that it implemented import tariff exemptions for six oil and chemical products from the US that included white oil and food-grade petroleum wax, indicating positive signs that the two countries will sign the ‘Phase one deal soon in January 2020. Still uncertainty remains as market needs clarity around what the deal entails. The longer the market has to wait, the more likely market participants will start to question how good a deal it actually is.

On the data front, the US GDP increased at a 2.1 per cent annualised rate and consumer spending grew at a steady 0.4 per cent in November, having seen its strongest gain since July. The incomes bounced back to 5.9 pe cent by value per year and 6.8 per cent by number per year from 2012 to 2015.

With consumer spending keeping the economy at a steady pace of growth and resilience in many economic sectors, the US remains in a festive mood this holiday season. Meanwhile, the US dollar strength in the past months has dragged down crude as Dollar Index has been keeping uptrend since mid-2018.

In its year-end Short-Term Energy Outlook, the US Energy Information Administration (EIA) forecast that Brent spot prices will be lower on average in 2020 than in 2019 on rising global oil inventories, particularly in the first half.

Trade deal updates
Prices were lifted last week on increasing hopes that phase one trade deal between the US and China would lead to increased future demand. On Monday, China reported to cut import tariffs for goods including frozen pork, the import of which may relieve meat shortages due to the outbreak of swine fever, China will reduce levies on products including frozen avocados, non-frozen orange juice, new asthma and diabetes drugs, key components and machines for manufacturing integrated circuits, and some logs and paper products starting from January 1.

While the move isn’t directly related to the US-China trade war, it supports Beijing’s claim to be further opening its economy as it pursues a deal with the Trump administration. The reduction will mean China has a total of 859 types of products enjoying provisional import tariffs lower than the existing most favored nation rates charged in 2020. On Thursday, China announced a list of import tariff exemptions for six oil and chemical products from the United States, further boosting the demand outlook.

Inventories and Rig

1. Crude Inventory -1.1 million barrels vs -2.5 mbpd expected

2. Gasoline +2.5 million vs +2.4 million expected

3. Distillate +1.5 million vs +6,00,000 Expected

4. Rig count: Increased by 18, first double-digit increase in 8 months.

Natural Gas

Prices continued to fall after Sunday forecast showing the warmer weather forecast for 6-8 days. At present, short sellers are dominating the market from mid-August and near-record speculator short positioning in mid-December could foreshadow a similar rally in early January.

The EIA reported a 107 Bcf withdrawal from natural gas storage, well-above the consensus estimate of 87 Bcf. Nat Gas Weather reported that the next 11 days are absolutely bearish as far as weather patterns and national demand. However, the data teases colder around January 3-5 to at least something more seasonal. A colder weather pattern January 3-5 will be needed after the weekend break or bearish weather headwinds will continue.


Market participants should remain cautious for this week and watch closely the US-China trade negotiations as well as the US-Germany dispute over Nord Stream 2. US President Donald Trump on Friday signed into law a $738 billion defense bill, which includes controversial provisions calling for sanctions against Russia and Turkey. The bill said it could protect European energy security by imposing sanctions related to Russian energy pipelines Nord Stream 2 and TurkStream.

Currently, the market is in a holiday mood and the week can go either way. Low volume can also produce whipsaw action so be prepared for wild swings, but volume would play a major role to gauge the strength of the markets.

(Investors are advised to consult financial advisers before taking an investment calls based on these observations)

Source: Economic Times