Oil Market Roundup - Friday Week 3

Friday January 18, 2019

Sentiment once again triumphed over fundamentals in the crude trading community on Friday, with reports that China plans to increases purchases of U.S. goods over the next six year causing oil prices to reach a two month high.

West Texas Intermediate ended Friday's session up $1.73, or 3.3 percent, at $53.80 per barrel, while Brent rose $1.50, or 2.5 percent, at $62.68 per barrel; these are the best closing since November 21 and December 7, respectively, and Friday's activity also enabled oil to post a third consecutive week of gains.

However, the idea that Beijing's plan to ramp up purchases of U.S. goods signals a breakthrough in the hostilities between the two countries is premature in the extreme: according to Bloomberg, U.S. trade negotiators are skeptical of the offer and point out it doesn't address more pressing issues such as barriers to accessing the Chinese market and China's alleged theft of intellectual property.

That said, it's undeniable that crude's performance so far in 2019 is a far cry from the steep price plunges experienced in the closing months of 2018, a point not lost on Bloomberg, which on Friday noted that the commodity hasn't started off this strong since the turn of the century.

The news agency, which compiled data from the New York Mercantile Exchange, went on to remark that "U.S. crude prices have rebounded more than 18 percent to start this year: that's the biggest climb over the first 13 trading days since January 2001."

In addition to perceived progress in the U.S./China trade talks, it cited as two other reasons for trader optimism "a more dovish stance on interest-rate hikes from the Federal Reserve and signs that OPEC-led production cuts are starting to take a bite out of supplies."

Along with Friday's gains came the unsurprising expressions of analytical optimism: Bob Iaccino, co-founder and chief market strategist of Path Trading Partners, told Bloomberg television that crude may well reach $65 per barrel with 2.5 months, pending a U.S./China settlement and based on signs that U.S. shale production is slowing (ie: the latest Baker Hughes data showing that drillers pulled 21 oil rigs from U.S. fields last week, bringing the national rig count to 852, the lowest since last May).

Neil Atkinson, head of oil industry and markets division at International Energy Agency, told Bloomberg television that "We think during the first quarter of 2019, supply and demand will be fairly closely matched" as long as the supply cuts promised by the Organization of the Petroleum Exporting Countries are implemented.

However, he stressed that "there are headwinds" in the form of possible other geopolitical disputes and a slowdown of demand.

Indeed, Tamar Essner, director of energy and utilities at Nasdaq Corporate solutions, called the level of demand "The most unknown question for the oil markets for 2019....people are really worried about these red flags in China in terms of auto sales coming down, retail sales coming down, and they're looking at that and saying maybe this is a leading indicator — that demand might come down in the future."