Hope for U.S./China Breakthrough Causes Oil Prices to Jump 1.4%

Monday March 4, 2019

Once more, sentiment was able to reverse what was shaping up to be a Monday of crude trading losses,with optimism over the U.S. and China settling their differences outweighing concerns over weak demand and resulting in U.S. oil rising 1.4 percent.

West Texas Intermediate crude settled 79 cents higher at $56.59 per barrel, a 1.4-percent gain on the day, while Brent rose 60 cents at $65.67 per barrel.

Monday was only notable in that trading patterns were entirely predictable: traders earlier in the session were said to have been spooked by Bank of America Merrill Lynch stating in a note that "2018 was the weakest (refined product) demand growth year since 2011."

The concern was exacerbated by energy analysts at TS Lombard remarking that "Near term ... it is hard to get very bullish on oil prices: the market is still working off the surpluses built in H2 2018, keeping OECD commercial inventories stuck above the five-year average."

However, positive sentiment took over when an anonymous source briefed on the negotiations told media that Washington and Beijing appeared close to a deal that would roll back U.S. tariffs on at least $200 billion worth of Chinese goods in exchange for China pledging to make structural economic changes and ending American tariffs on the United States.

The optimism focused on this specific issue seems to have legs: John Kemp, commodities analyst for Reuters, pointed out that "Portfolio managers seem increasingly convinced the United States and China will reach a trade deal and the global economy will avoid a prolonged and deep slowdown" - and that fund managers have been net buyers of 155 million barrels of Brent futures and options since December 4, increasing their net long position in 11 out of the last 12 weeks.

It's unclear whether a breakthrough in the U.S./China negotiations would escalate demand to the degree that would offset crude surpluses, but as far as Jeff Currie, global head of commodities research at Goldman Sachs, is concerned, the market is headed for somewhat calmer waters in the near future thanks to the Organization of the Petroleum Exporting Countries' (OPEC) production cuts.

Speaking on CNBC television on Monday, Currie noted that the cartel is throttling back output faster than Goldman expected: "This market is likely to be rebalanced by April."

Currie also mused that if OPEC telegraphs its plans for lifting the production curbs by May or June, it may dissuade U.S. drillers from turning on the taps, thereby preventing another price-crushing oil glut.

He then contradicted common analytical wisdom that demand for oil is waning by concluding that OPEC's cutbacks combined with "robust" demand could easily push Brent back to $70-$75 per barrel in the near term.