Oil Price Fundamental Weekly Forecast – Rally Drivers Are Optimism Over Trade Deal, OPEC Production Cuts

Last week’s rally indicates that two events will need to take place to sustain the current rally. Firstly, the U.S and China have to continue to make progress toward a trade agreement, and OPEC must continue to adhere to its strategy to limit output. This is because of the U.S. goal to become a net exporter while reducing its reliance on foreign oil.
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week on the news that both the United States and China may have offered concessions in an effort to bring the two economic powerhouses closer to a resolution of the on-going trade dispute. Crude oil traders liked the news because it could lead to stronger demand later in the year if the end of the trade dispute triggers a turnaround in the slowing global economy.

For the week, March WTI crude oil settled at $54.04, up $2.13 or +4.10% and March Brent crude oil closed at $62.70, up $2.22 or +3.54%.

Trade Deal Hope Spurs Rally Along With OPEC-led Cuts

The catalysts behind last week’s rally was the hope of a deal between the United States and China that would bring an end to the ongoing trade dispute between the world’s two largest economies. Additionally, adherence to the OPEC-led plan to cut production, trim the excess global supply and stabilize prices, also supported the rally.

Perhaps keeping a lid on prices were concerns over rising U.S. production and lower global demand.

U.S, China May Have Offered Concessions

After a mostly sideways trade earlier in the week, crude oil prices picked up a bid on Thursday in reaction to a report in The Wall Street Journal that Treasury Secretary Steven Mnuchin had floated the idea of easing tariffs on Chinese goods. The rally stalled, however, after Treasury officials told CNBC that there is “no discussion of lifting tariffs now.”

Buyers reasserted themselves on Friday when Bloomberg News and CNBC reported that China had offered to increase imports of U.S. goods over the next six-years in an effort to eliminate the U.S. trade deficit.

OPEC Shows It Is Serious About Cutting Production

The late-in-the-week rally in crude oil was also supported by an OPEC report that showed its production fell sharply in December, relaxing some concerns over a prolonged supply glut.

OPEC’s monthly report showed the cartel along with its major allies including Russia, hit the ground running a month before the official start of its plan to cut production on January 1. The report showed the biggest month-on-month output drop in almost two years.

Energy Information Administration Says U.S. Production is Rising

On Wednesday, the EIA said American drillers pumped a record 11.9 million barrels per day in the week-ending January 11, up from 11.7 million bpd last week, which was already the highest national output in the world.

Furthermore, the Department of Energy forecasts U.S. oil production will jump from 10.9 million barrels per day in 2018 to 12.9 million bpd in 2020. Additionally, the U.S. is also expected to start exporting more crude oil and fuel than it imports in 2020.

OPEC Sees Lower Demand

OPEC also said in a report that it expects demand in 2019 to fall almost 1 million barrels a day less than last year as supply is expected to outweigh demand.

Forecast

Last week’s rally indicates that two events will need to take place to sustain the current rally. Firstly, the U.S and China have to continue to make progress toward a trade agreement, and OPEC must continue to adhere to its strategy to limit output. This is because of the U.S. goal to become a net exporter while reducing its reliance on foreign oil.

Despite the series of potentially bullish events, traders remain cautiously optimistic about the upside potential of the market primarily because of concerns over rising U.S. production and the difficulty of reaching a trade agreement between the U.S. and China in a timely manner.

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