Trade Wars And Shutdowns

Trade talks are the main issue for oil. Last week oil fell off after Larry Kudlow told Stuart Varney on the Fox Business Network that the U.S. and China are still miles apart on a trade deal. While that comment may be just a negotiating tactic, the market took it seriously and went on to post its worst week of the new year. Yet, this morning Marketwatch reports that Asian stocks were mostly higher on Monday as traders watched for developments on a fresh round of trade talks between American and Chinese officials in Beijing this week. Markets in China and Taiwan, reopening after a weeklong Lunar New Year break, posted broad gains. So perhaps there is hope for a deal. If we get a deal, oil should get a quick $5 bounce.

OPEC cuts are starting to take its toll and U.S. demand is still robust. In fact, with all the talk of weakening economies globally, oil demand has held up quite well. U.S. production could slow as Baker Hughes reported U.S. rig count rose by only 4 rigs to 1,049 last week. While oil rigs did rise by 7 to 854 natural gas rigs fell -3 to 195.  The trend for both oil and gas rigs are decidedly lower over the last month.

Overall, we have some hurdles on the upside. Still, we predict that we will get a U.S. China deal. We also feel that the loss of Venezuelan crude will support oil products. In the short term, we can see some range trading longer term with the combination of OPEC cuts, less heavy oil and a U.S. economy that is on fire that will leave the market very tight as we look ahead to the switchover to the summer blends of gasoline. Be patient and strategic, but long term there is much more upside than downside.

Natural gas gapped up a bit as a return to cold temperatures is increasing demand expectations. Andy Weissman, Publisher and Editor-in-Chief of Market Quick Takes, says that over the weekend, projected space heating demand for this coming week continued to slide. The balance of February and the first week of March, however, gained more than 40 HDDs. This whopping increase is likely to push natural gas up significantly on Monday. With only seven to eight weeks left in the withdrawal season, the March gas contract is likely to struggle to reach resistance at $2.78/MMBtu. The return of cooler weather across the central and eastern U.S. could significantly bolster regional heating demand and power prices this week. Temperatures are likely to remain warmer than normal, however, moderating this increase.

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