Impending U.S./China Deal Causes Soaring Crude Prices - But Analysts Still Grim About the Future

by Ship & Bunker News Team
Friday November 1, 2019

With a "consensus of principles" apparently reached between negotiators of a new trade deal between China and the U.S., oil prices on Friday rose nearly 4 percent - but still incurred weekly losses.

The consensus, announced by Beijing's state-media Xinhua News Agency, caused Brent to end Friday's session up $2.07, or 3.5 percent, at $61.69 per barrel (a drop of about 0.4 percent for the week), while West Texas Intermediate crude settled $2.02, or 3.7 percent higher, at $56.20 per barrel (a fall of about 0.8 percent in the week).

Still, all signs point to what could be a massive shift in the analytical mindset of where the global economy is headed, since the prevailing concern up until Friday was that the U.S./China trade war had damaged the economy and threatened to make it much worse moving into the New Year if left unresolved.

Larry Kudlow, economic advisor to the White House, told media that negotiators had made "enormous progress" toward finalizing a "phase one" agreement, although the deal was not yet  fully complete; it is said that the U.S. intends to sign an initial deal this month.

John Kilduff, founding partner at Again Capital Management, said, "This markedly improves the outlook for the global economy – particularly in Asia where it has suffered the most from the fallout from the trade war."

A similarly-minded Gene McGillian, vice president of market research at Tradition Energy, explained this week's crude trading patterns by remarking, "The market has been driven lower this week on fears of slowing demand growth because of uncertainty regarding U.S.-China trade relations and a sizeable expected build in crude stocks.

"I think today's action is a reversal of that, and you're probably also seeing some weekend covering."

More good news supporting crude prices on Friday came in the form of reports that China's factory activity was at the fastest pace since 2017 (contrary to earlier reports), and that U.S. jobs growth also slowed less than expected in October.

Perhaps with this in mind, traders ignored news that U.S. crude production soared nearly 600,000 barrels per day (bpd) in August to a record 12.4 million, buoyed by a 30 percent increase in Gulf of Mexico output - something that an energized economy under a new U.S./China trade deal can easily absorb.

But as always, pessimism is prevalent in analytical circles: Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note published Friday that doubts about whether the U.S. and China would reach a conclusive trade agreement later this month had added "insult to injury."

With this premise (presumably rendered invalid given Friday's upbeat negotiations news) in mind, Brennock went on to argue that "This latest ramp up in OPEC and U.S. supply extinguished any remaining pockets of upside potential." He was referring to the Organization of the Petroleum Exporting Countries output rising by 690,000 bpd in October.