Perception of Softening Trade War Supports Crude, But Kemp Wants Lower Prices For Longer

Tuesday August 20, 2019

The possibility of a breakthrough with U.S./China trade relations coupled with the hope that a global economic slowdown may be halted resulted in modest gains for crude prices on Tuesday.

Brent gained 29 cents to settle at $60.03 per barrel, while West Texas Intermediate rose 13 cents to $56.34 per barrel.

Traders were specifically motivated by Washington stating on Tuesday that it would extend a reprieve that permits China's Huawei Technologies to buy components from U.S. companies; according to John Kilduff, founding partner at Again Capital, this represented "The ebbing and flowing of the U.S.-China trade war and some hope of economic stimulus that's coming at these markets."

Additionally, crude was supported by China's new lending reference rate set slightly lower on Tuesday, after the central bank announced interest rate reforms designed to reduce corporate borrowing costs; meanwhile, Germany's coalition government said it would be prepared to ditch its balanced budget rule and take on new debt to counter a possible recession.

Possibly, more price gains could come on Wednesday: the American Petroleum Institute on Tuesday reported that crude inventories fell by 3.5 million barrels in the week to August 16 to 439.8 million, compared with analysts' expectations for a decrease of 1.9 million barrels.

However, John Kemp, commodities analyst for Reuters, doesn't think any price gains would necessarily be good for the market overall: on Tuesday he noted that global oil consumption is falling at the fastest rate for almost five years, and "A sustained period of lower prices will be needed to curb shale production growth and make consumption more affordable to restore market balance."

He went on to remark that "Production and consumption should rebalance by mid-2020, provided the global economy does not slide into a recession in the meantime, cutting oil use further.

"Recession risk is now the single biggest factor driving oil prices because it will determine whether recent price falls will be enough to rebalance the market, or whether a deeper and longer slump is needed."