Solid Base

Oil is getting a boost on trade deal hopes as well as a week of optimism that global central banks are ready to be more accommodative to support economic growth. For oil that is very supportive because despite of all the talk of a reaction, oil demand has not seen any significant decline. That, of course, means that OPEC is already complying with production cuts ahead of schedule even if we see the Russians are moving slowly like Russia always does. The IEA, while they see a long slog to market balance, their own data that they released doesn’t seem to support their thesis. And while we still have some resistance above before oil really breaks out, the trading in this range suggest that the longer we consolidate the bigger the ultimate upside price move.

Oil was bouncing off support stuck in a range but turned decidedly higher on a Wall Street Journal report that “ U.S. officials are debating ratcheting back tariffs on Chinese imports to calm markets and give Beijing an incentive to make deeper concessions in a trade battle that has rattled global economies. The idea of lifting some or all tariffs was proposed by Treasury Secretary Steven Mnuchin in a series of strategy meetings, according to people close to internal deliberations. They say the aim is to advance trade talks and win China’s support for longer-term reforms. But Mr. Mnuchin faces resistance from U.S. Trade Representative Robert Lighthizer, who is concerned that any concession could be a sign of weakness, these people said.”

Yet denials from the White House about the story caused a pause in the market enthusiasm, yet the market is tending to believe it because it would make too much sense. President Trump wants a deal and the Chinese have already made some concessions buying U.S. grains and oil for example and the desire to get this done soon would be in everybody’s interest.

It is Saudi Arabia’s interest to get oil back to $80 a barrel. Reports confirm what we have been hearing that Saudi Arabia cut production by more than expected, by 468,000 bpd to 10.5 million bpd, according to independent country data. The International Energy Agency (IEA) says that while Saudi Arabia is determined to protect its price aspirations by delivering substantial production cuts, there is less clarity with regard to its Russian partner. Data shows that Russia increased crude oil production in December to a new record near 11.5 mb/d and it is unclear when it will cut and by how much. Other non-OPEC countries joining in the output deal saw higher output, including Mexico. U.S. oil production growth combined with a slowing global economy will put oil prices under downward pressure in 2019, challenging OPEC’s resolve to support the market with output cuts.

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