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Oil Climbs on Trade Talks, Saudi Cuts; Caution Prevails

Commodities Jan 07, 2019 03:01PM ET
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© Reuters. - U.S.-Sino trade talks, speculation over Saudi output cuts and data suggesting lower Cushing stockpiles helped oil add to 2019 gains on Monday, though the settlement off the highs also showed bulls were being cautious of overextending themselves.

U.S. West Texas Intermediate crude settled up 56 cents, or 1.2%, at $48.52 per barrel, after reaching a high of $49.79.

Brent, the U.K.-traded global crude benchmark, settled up 27 cents, or 0.5%, at $57.33, after rallying to $58.92 earlier.

A Bloomberg opinion piece warned of a more likely outcome if crude prices got a lot higher: Tweets from President Donald Trump aimed at pushing the market lower.

"(Trump) may soon have to direct his ire to oil prices and the actions of his ally, Saudi Arabia, once again," Julian Lee, a Bloomberg opinion columnist, said, as U.S. West Texas Intermediate looked ready to break the key resistance of $50 per barrel soon.

Lee noted that the Saudis have begun delivering on the 1.2 million barrels per day in cuts that the OPEC+ group, which includes Russia, pledged and the president could respond adversely to the resultant price boom if he felt it was beginning to weigh on economic growth.

Dow Jones quoted OPEC officials as saying that Saudi Arabia were hoping to get $80 oil by cutting exports to 7.1 million bpd, down 800,000 bpd from November levels. But crude trader Samir Madani tweeted that the Saudis were "looking pretty desperate" to push up the market. "It is not an aggressive export cut as exports averaged 7.254 million bpd during 2018 by their own account," Madani added.

"Caution seems to be the overarching factor with the Libyans coming back to the market in a big way," said Tariq Zahir at Tyche Capital Advisors in New York. Libya aims to more than double its oil production to 2.1 million bpd by 2021, Reuters reported.

The U.S. and China kicked off talks in Beijing Monday in the first face-to-face meeting since Trump and Chinese President Xi Jinping in December agreed to a 90-day truce in their trade war. While stocks on Wall Street were quiet awaiting the outcome of the talks, oil bulls cheered news that Chinese Vice Premier Liu He unexpectedly attended the opening of the meeting.

Optimism has run higher in equity markets to oil since Friday after Fed Chairman Jerome Powell indicated he will be patient with future rate hikes, as Trump has been hoping the central bank would. Powell made his remarks after a strong U.S. jobs report for December.

Monday's trading in oil got a further boost from a drop in WTI inventory estimates at the Cushing storage hub, which fell by 565,225 barrels between Jan. 1 and Jan. 4, according to private data seen by traders.

Despite that, some like Dominick Chirichella, director of risk and trading at the Energy Management Institute in New York, cautioned that it was "still too early to declare that the downtrend has reversed".

Analysts at Goldman Sachs (NYSE:GS) forecast a 3-month and 6-month price of $62.50 and $67.50 for Brent, respectively, versus their previous call of $70. For WTI, it was $55.50 versus $64.50 previously. The Goldman analysts cite new pipelines that will release more cheap U.S. shale oil from the Permian Basin and slowing Chinese demand, among others.

The first contraction in 19 months in China’s Purchasing Managers Index (PMI) in December has strengthened some economists’ belief that the world’s second-largest economy is headed for a slowdown. And despite the feel-good vibe over the US-Sino talks, some say it’s premature to conclude that it’s a done deal. Any shift in China’s stance toward the trade talks would be volatile for equities and, consequently, crude prices.

Oil Climbs on Trade Talks, Saudi Cuts; Caution Prevails

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