Oil Up On Optimism Over Second Trade Deal, But Commodity Has An "Ultimate Cap", Says Citi

by Ship & Bunker News Team
Thursday January 16, 2020

The approval of a revamped 26-year-old North American Free Trade Agreement, hot on the heels of the signing of the new trade deal between the U.S. and China, caused traders to give crude prices on Thursday a modest upward bump - and for once, analysts are guardedly optimistic that demand will rise in the near future.

Brent settled up 62 cents to $64.62 per barrel and West Texas Intermediate rose by 71 cents to $58.52 per barrel on the strength of the U.S. Senate on Thursday approving the new U.S.-Mexico-Canada Free Trade Agreement, a day after China agreed under its new deal to buy $50 billion more of U.S. oil, liquefied natural gas and other energy products over two years.

Although both deals have received their fair share of criticism from the analytical  community, Phil Flynn, senior market analyst at Price Futures Group Inc., enthused, "We had the U.S-China trade deal yesterday - signed and sealed - and now you got the U.S.-Mexico trade going through the senate, so I think the optimism surrounding the demand is rising exponentially right now."

Flynn even downplayed bearish sentiment from the International Energy Agency, which believed oil production will outpace demand for crude from the Organization of the Petroleum Exporting Countries (OPEC) -  even if its members comply fully with the output cut agreement.

Flynn argued that the EIA may be underestimating the potential demand boost from the U.S.-Mexico trade accord and the U.S. China trade deal.

In other surprising news Thursday, the International Energy Agency pointed out that surging oil production from non-OPEC countries led by the U.S., along with abundant global stocks - usually a source of consternation within the analytical community - gives the market a better chance to withstand geopolitical conflict such as the U.S./Iran standoff.

The IEA stated, "For now the risk of a major threat to oil supplies appears to have receded.

"Today's market, where non-OPEC production is rising strongly and OECD stocks are 9 million barrels above the five-year average, provides a solid base from which to react to any escalation in geopolitical tension."

However, the general long-view argument in many circles remains that oil's importance and its potential for further price upsides is limited: this time, that view was espoused by David Bailin, chief investment officer at Citi Private Bank, who on Thursday noted that the cost of producing electricity from solar energy has in the last two years been lower than that of fossil fuels.

Bailin said that a shift from oil, natural gas and coal to solar power in electricity generation will be "the ultimate cap" on prices of fossil fuels: "We believe that's a permanent change; in fact, our clients were investing in that as an unstoppable trend because now you can identify that cost point, it's a great opportunity."