Oil Price Fundamental Daily Forecast – Trade Talks, China Stimulus Encouraging Shorts to Cover

Crude oil prices are also being supported by the OPEC-led supply cuts and increased appetite for risk due to dovish comments from Fed Chair Jerome Powell on Friday.
James Hyerczyk
Crude Oil
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Monday with the buying being driven by events taking place in China. Some of the move is follow-through buying from Friday’s announcement that face-to-face negotiations between the U.S. and China will take place in Beijing on January 7-8. The markets are being further supported by China’s aggressive monetary policy easing also announced on Friday.

At 0901 GMT, February WTI crude oil is trading $48.91, up $0.95 or +1.96% and March Brent crude oil futures are at $58.21, up $1.15 or +2.02%.

Nothing major has come out of the talks in China yet, but today’s price action indicates that investors are optimistic that the negotiations will help to ease tensions between the world’s two biggest economies.

After a series of weaker-than-expected manufacturing reports, which signaled an economy being damaged by the trade dispute, the People’s Bank of China on Friday cut reserve requirements for all banks by 100 basis points. This makes available about $116 billion in funds for new lending. The plan is to provide stimulus for the economy and slow down the impact of U.S. tariffs. Traders are hoping that more stimulus will revive the economy. This would drive up demand for crude oil.

Crude oil prices are also being supported by the OPEC-led supply cuts and increased appetite for risk due to dovish comments from Fed Chair Jerome Powell on Friday. OPEC and its allies including Russia, agreed in December to reduce output by 1.2 million barrels per day (bpd) in 2019 versus October 2018 levels. This is supposed to trim the excessive global supply and stabilize prices. However, it’s going to take time. Traders feel that if OPEC can stay true to the deal, the global supply glut could be cleaned up within 3 to 4 months. Powell said the Fed would be more patient with future rate hikes.

In other news, U.S. energy firms reduced oil rigs for the first time in three weeks as producers began to shrink their 2019 drilling plans due to the collapse in crude oil prices during the last quarter of the year. According to General Electric’s Baker Hughes energy services firm, drillers cut eight oil rigs in the week to January 4.

Forecast

Last week’s shift in sentiment is supportive for WTI and Brent crude oil. However, traders still have to deal with the large amount of hedge fund shorts still in the market. I don’t think we can have a long-term rally until the strong shorts turn into strong longs.

The key area to watch for WTI crude is $48.57 to $50.03. A trade through $50.03 will probably shake out a few of the shorts, while a move through $48.57 will signal that the short-sellers are still in control.

The key area to watch for Brent is $57.11 to $58.71. Look for the market to strengthen on a sustained move over $58.71 and weaken on a sustained move under $57.11.

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