Crude Tests Resistance as Chinese and U.S. Trade Spat Abates

Crude oil prices moved higher on Monday, testing resistance following an an announcement from Treasury Secretary Steven Mnuchin that the trade war between the United States and China has been put on hols for the time being. China and the United States according to Mnuchin are currently working on a wider trade agreement, after the exchange of tariff threats that rattled markets earlier this year.

Technicals

Crude oil prices pushed higher testing the May highs, and poised to breakout following Secretary Mnuchin’s announcement.  Support on crude oil is seen near the 10-day moving average at 71.10.  Resistance is seen near the May highs at 72.30.  A break of this level would lead to a test of the 75-handle. Momentum is neutral, and prices are oversold. The MACD (moving average convergence divergence) index is printing near the zero-index level with a flat trajectory which reflects consolidation. The fast stochastic is printing a reading of 96, above the overbought trigger level of 80 and could foreshadow a correction.

Venezuela is Squeezing Supply

Additional fuel price pressures came from Venezuela, where incumbent president Nicolas Maduro won the vote Sunday, which will prompt a reaction from the United States, and this reaction will likely target the crisis-stricken country’s main revenues source, its oil industry. Venezuela’s oil is already deep in the doldrums with production at the lowest in 70 years and still falling, and with Conoco seizing essential PDVSA assets in the Caribbean.

Yet the upside potential of oil prices is limited as many industry insiders and analysts believe there is ample supply to respond to rising demand. None other than Saudi Arabia’s Energy Minister Khalid al-Falih last week told media there is no reason for Brent to go higher than US$80 as there is enough oil being produced globally to match demand.

Shale oil production in the United States is also acting as a deterrent to prices

Shale oil production in the United States is also acting as a deterrent to prices. In the week to May 11 the average daily in the U.S. hit 10.72 million barrels largely thanks to the surge in shale production. OPEC stepping in to cover potential supply shortages from Iran after U.S. sanctions kick in later this year will help the downward pressure.

U.S. Chicago Fed’s National Activity index rose

U.S. Chicago Fed’s National Activity index rose 0.02 points in April to 0.34 after falling 0.41 points to 0.32 in March which was revised from to 0.10. January was revised lower to -0.35 from -0.26, with December now at 0.16 from 0.22. The 3-month moving average doubled to 0.46 from 0.23 (revised from 0.27). Of the 85 components, 50 made positive contributions, and 35 made negative contributions. The 0.86 was the highest December 2006.

Fed’s Bostic repeated the Fed is close to its dual goals

Fed’s Bostic repeated the Fed is close to its dual goals on maximum sustainable employment and price stability, in his prepared remarks on the economy before the Atlanta Economics Club. He projects 2018 growth in the 2.5% area, with activity fading to 1.75% over the medium term. The economy is close to full employment, though acknowledged that wage growth remains tepid. While measured inflation is effectively on target, he wouldn’t be surprised if prices overshoot the 2% goal modestly, even with further removal of accommodation. He said the important characteristic of a “sound monetary policy framework is that it provides a credible nominal anchor, while maintain flexibility to address changing circumstances,” and he added he could see some form of “flexible price-level targeting.”

Treasury Secretary Mnuchin said we made meaningful progress

Treasury Secretary Mnuchin said we made meaningful progress in the latest U.S.-China trade talks and will increase U.S. exports to China significantly. He said that lowering of tariffs with China was discussed. Mnuchin said the U.S. was unified on the trade talks with China and Trump didn’t dictate any terms on the U.S. review of China’s ZTE, where some possible enforcement changes were being reviewed. He said both the U.S. and China have agreed to suspend tariffs and the U.S. could increase energy exports to them, though talks have to be turned into binding agreements with companies. Yet Commerce Secretary Ross earlier said that only a framework on trade has been considered, and they’ve not ruled out any options at this stage. Ross will be sent back to China to put the framework in place, some of which will take time to implement.