Crude oil perks up on US-China trade deal optimism

March 6, 2019 3:58 pm

Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM

As the Oil markets enter the second quarter, we’re far away from the worst-case scenario predicted by the bears who believed that the commodity would head back down to 2014 lows and commodity prices would slump. While it’s true that Oil entered a bear market in late 2018 when taken in a longer-term context a less bleak picture emerges.

During the final quarter of 2018, the Oil price was undermined by one major factor: the impact on global growth amid the trade disputes between the world’s two largest economies. As optimism grows that a trade deal may be reached, the Oil price is receiving some more support and sentiment has improved compared to the end of last year.

Contributing to price support is OPEC’s firm stance on supply cuts as the cartel appears reluctant to blink in the face of criticism from US President Donald Trump’s comment on lowering Oil prices. If OPEC backtracks on its supply-cut commitments, there could be the worst-case scenario for the Oil bulls because US Shale production keeps hitting record highs. Any return to the over-supplies seen in late 2014 could significantly pressure Oil prices.

Then again, risking Trump’s disapproval could have equally negative geopolitical consequences and add to uncertainty for Oil traders. As it stands, OPEC hasn’t backed down on supply cuts but that may change in mid-March when the group meets in Baku, Azerbaijan. During the meeting, I expect OPEC may prioritise its own global interests, particularly the member states’ need for Oil revenues. The group might maintain current supply levels but avoid deeper supply cuts and further challenges to Trump’s policy of keeping Oil prices low in order to keep the markets balanced.

The Oil price has more tailwinds from two OPEC members. Venezuela’s decrease in production added to US sanctions on Iran means that the Oil price still has steady support even if US Shale is pushing production higher. Venezuela’s woes are still making headlines and even if this considerable risk has been mostly priced in, it still has the potential to trigger volatility if the situation worsens. The same can be said of any further geopolitical disturbances over sanctions on Iran and the delicate issue of the current head-to-head stance between the US and EU over Iran’s nuclear compliance agreement.  If this situation heats up again, the Oil price may heat up along with it, increasing demand for Oil and reminding the markets that Saudi Arabia had to unexpectedly increase production last year to calm supply fears.

March brings with it OPEC’s meeting in Baku and further trade talks between China and the US. These are the critical issues to watch for Oil price as we enter the second quarter. Even if China’s growth contracts, the prospect of a trade deal would go a long way towards improving confidence and expected demand for Oil. This would also prevent any sliding in the price benchmarks.

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Jameel Ahmad is an expert in financial market developments, and specialises in global currencies, commodities and emerging markets. FXTM’s VP of Corporate Development and