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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and International-benchmark Brent crude oil futures finished higher last week with Brent showing a slight edge over the U.S. brand. Traders faced a plethora of mixed reports last week that could have sent prices sharply higher or sharply lower. In the end, the bulls won the “Battle of the Headlines”, which leads me to believe it was the announcement of the resumption of U.S.-China trade talks that influenced the markets the most.

Last week, October WTI crude oil futures settled at $56.52, up $1.42 or +2.58% and December Brent crude oil finished at $60.57, up $2.11 or +3.48%.

Last week’s fundamentals and price action indicate the market has actually found a comfort zone where it’s not too bullish or too bearish. Buying dips and selling rallies seems to have become the norm for more than a month, and this type of price action is likely to continue until there is a trade deal in place, or the odds of a global recession increase.

The news this week was a combination of both bullish and bearish events with the bullish news producing a slight edge.

Bullish:  U.S.-China Announce Resumption of Trade Talks

Helping to turn around and underpin WTI and Brent crude oil futures this week was the news that the United States and China will resume trade talks. China’s commerce ministry said Beijing and Washington agreed to hold high-level trade talks in early October.


Bearish: US Factory Output Contracts

The Institute for Supply Management (ISM) said its index of national factory activity decreased to 49.1, the lowest level since January 2016, amid worries about a weakening global economy and rising trade tensions between China and the United States.

Bullish: China’s Services Sector Stronger than Forecast

On Wednesday, crude oil prices soared 4% after China reported better-than-expected services data. According to Reuters, “Activity in China’s services sector expanded at the fastest pace in three months in August as new orders rose, prompting the biggest increase in hiring in over a year.”

Bearish: API Reports Surprise Inventories Build

Crude oil prices were under pressure early in the session on Thursday after the American Petroleum Institute (API) announced a surprise crude oil inventory build of 401,000 barrels for the week-ending August 30, compared to analyst expectations of a 3.50 million barrel draw.

After yesterday’s announcement, the net draw for the year is 18.68 million barrels for the 36-week reporting period so far, using API data.

Bullish: EIA Report Shows Larger than Expected Draw

The U.S. Energy Information Administration (EIA) on Thursday reported that crude and product inventories fell during the week-ending August 30. Crude stocks dropped 4.8 million barrels, nearly double analyst expectations, to 423 million barrels, their lowest level since October last year.

Bearish: U.S. Job Growth Falls Short of Expectations

On Friday, the U.S. government reported nonfarm payrolls increased by just 130,000 in August. The increase fell short of Wall Street estimates for 150,000, while the unemployment rate stayed as 3.7% as expected. June and July job figures were also revised lower.

Weekly Forecast

The bullish tone is likely to extend this week as long as the U.S. and China hold true to their promise to begin trade talks in early October. We don’t expect much from the economic report side since the market has already made up its mind the Fed will cut its benchmark rate 25-basis points on September 18.

Tuesday’s American Petroleum Institute (API) and Wednesday’s U.S. Energy Information Administration (EIA) weekly inventories reports could produce some volatility, but shouldn’t have too much of an effect on upside momentum. Traders have locked into the fact that the OPEC-led supply cuts are helping to drive down U.S. inventories.

Furthermore, on Friday, Federal Reserve Chairman Jerome Powell said one thing that could help drive prices higher this week.

“We’re not forecasting or expecting a recession,” he said. “The most likely outlook is still moderate growth, a strong labor market and inflation continuing to move back up.”

This comment should be enough to offset any worries over demand growth this week and perhaps over the near-term.

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