“Phase One” Trade Deal Nearly Ready For Signing
According to the latest comments from President Trump the US and China are on course to sign off on the “phase-one” trade deal announced a few weeks ago. Speaking on Monday, Trump told reporters that the two countries were “ahead of schedule” in terms of signing the deal. The President’s comments lit a fire under global equity indices, sending the S&P 500 to new record highs. Despite a muted response in WTI markets so far, the news is positive for crude in the medium to long-run view. The economic stand-off between the US and China over the last 16 months has taken a heavy toll on the demand outlook for crude which has made it very hard for WTI to sustain any upside. Global manufacturing readings have been trending lower, reflecting the damage to the global economy, which has again pulled oil lower. However, if the US and China do sign off on the “phase one” deal, creating a platform to move forward with the “phase two” deal, this should help bolster the outlook for crude demand. If the Chinese manufacturing machine is able to start working effectively again, this will certainly lead to a large increase in crude demand given that China is the number one consumer of crude worldwide.
The stickiness in oil prices has drawn more attention from OPEC recently leading to reports that the 13 member cartel is now considering taking further action to boost prices, which could be announced at its upcoming December meeting. There have also been reports this week that Brazil is looking to become an OPEC member.
Speaking on Wednesday, Brazilian President Bolsonaro said that the country is looking to join OPEC. Brazil is just about to host a massive oil rights auction which will see its output levels dramatically increased. If Brail did join OPEC this would require Brazil to limit its oil output. Without joining, this increase in output will cause further difficulties for OPEC. Despite Bolsonaro’s comments, however, OPEC said that it has not yet received any official request.
According to the IEA, WTI output in Brazil has increased heavily seeing offshore fields and production surging by 220,000 bpd in August to a record 3.1 million bpd as of last month. At these levels, should Brail join OPEC it would become the third - largest producer with its output accounting for more than 10% of the current OPEC total.
EIA Inventories Increase
WTI prices came under pressure further this week as the EIA reported a large, unexpected build in US crude inventories. Following the prior week’s drawdown, the EIA report showed inventories jumped by 5.7 million barrels last week. This was far higher than the 494,000 barrel surplus analysts were forecasting ahead of the release. The increase was attributed to a jump in US crude imports as well as a release from the national reserves.
Technical & Trade Views
WTI Crude (Neutral, bearish below $55, bullish above)
WTI From a technical and trade perspective. Longer term VWAP remains negative suggesting the risk of further losses. In line with longer-term VWAP I will be looking for a break of the monthly S1 at $50 where we also have a few big previous swing lows. Once below here, any retest of the level should offer further short opportunities moving down towards $45. On the other hand, if we break back above the monthly pivot at $56.67 a retest of the level from above should find support.
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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!