Trump Could Trigger Bullish Response in Crude Oil with Optimistic Tone on Trade Deal

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures tumbled on Tuesday ahead of the release of the American Petroleum Institute’s weekly inventories report later in the session. The markets weakened on continued concerns over a slowdown in the U.S. economy after Monday’s weaker-than-expected U.S. Factory Orders report. Buyers were also encouraged to shed long positions on renewed concerns over lower demand due to the slowdown in China’s economy amid uncertainty over U.S.-China trade relations.

At 20:00 GMT, March WTI crude oil futures are trading $53.69, down $0.87 or -1.61% and April Brent crude oil futures are at $62.00, down $0.51 or -0.83%.

Despite hitting a 2-month high last week, crude oil prices have been chopping inside a tight range for several days as investors try to determine the key catalyst in the market at this time. Bullish traders are banking on the Venezuelan oil sanctions and the OPEC-led production cuts to provide support. Bearish traders are expressing concerns over the weakening global economy and signs of a slowdown in factory production.

Markets Underpinned by Sanctions and Production Cuts…

Longer-term investors believe the OPEC-led production cuts could eventually trim the global supply glut while stabilizing prices. This notion was supported last week by a Reuters survey which showed that supply from OPEC states had fallen the most in two years. Short-term, speculative buying interest is being driven by the U.S. sanctions on Venezuela. CNBC is reporting that numerous tankers are currently in the water off the Venezuelan coast, unable to move because state-owned PVDSA is demanding payment, which would be a violation of U.S. sanctions.

But Gains Capped by Weakening Global Economy and U.S. Demand Concerns

Two weeks ago China announced that its official economic growth came in at 6.6 percent in 2018, the slowest pace since 1990. Shortly thereafter, the International Monetary Fund (IMF) lowered its outlook for the global economy for a second time in three months. The lender now predicts growth of 3.5 percent this year, the weakest in three years and down from 3.7 percent expected in October. The fund also warned trade tensions could spell further trouble.

Last week, China said its manufacturing activity contracted for the second-straight month in January, another sign that the world’s second-largest economy is slowing down amid domestic headwinds and the on-going trade dispute with the U.S.

This news may have been offset by robust U.S. jobs data and a stronger-than-expected ISM Manufacturing PMI report on Friday, but traders turned bearish on Monday when the government reported that new orders for U.S.-made goods unexpectedly fell in November amid sharp declines in demand for machinery and electrical equipment, suggesting a slowdown in manufacturing as 2018 ended.

Near-Term Outlook

The recent downswings in the crude oil market have been highly correlated with the release of the bearish economic data. Therefore, I have to conclude that speculation over the positive outcome of U.S.-China trade talks and the unexpected sanctions on Venezuelan oil have been the biggest influences on prices over the short-run.

With China on Lunar New Year holiday until next week, which reduces the chances of a trade deal this week, and the market likely to continue to absorb the lost supply from the sanctions, prices could remain under pressure all week.

Trump’s State of the Union Address is the Wildcard

Investors will be looking for clues in President Trump’s State of the Union speech on a number of matters, but crude oil traders will be listening for positive comments about U.S.-China trade talks. Expect a bullish reaction by crude oil traders if Trump sounds optimistic about the progress of a trade deal.