fundamental analysis oil
fundamental analysis oil

American light oil (USOIL) made significant gains this morning and early afternoon GMT in the aftermath of the USA and China having agreed a first stage for a trade deal. Better Chinese industrial data also gave fundamental support to the commodity. On the other hand, oversupply remains an issue in the long term.

USOIL touched a three-month high above $60.15 at around 14.20 GMT today with a slight retreat since then. Crude is currently trading around $60.07.

Hopes for a deal strengthen

 

China and the USA announced in separate press conferences on Friday evening that a phase one trade deal had been reached. This has the potential to halt the escalation of trade tensions between the two countries at least temporarily. As part of the deal, the USA has cancelled yesterday’s planned introduction of new tariffs on China in return for the latter committing to buy more American commodities, most notably crude oil.

This is a major boon for oil for two main reasons. China is the world’s largest consumer of crude oil due to its huge industrial base, so a better outlook for Chinese production is usually a big plus for the price of crude.

At this particular time, though, the news is very good for oil because of the current situation of oversupply. As USOIL held above the key area of $50 for some time, the threat of oversupply from shale production increased. The Energy Information Administration’s weekly figure for change in stocks has been positive almost every Wednesday since September as American producers ramp up barrels per day. China’s commitment to buy crude from the USA specifically might help refineries to discharge excess stock.

Chinese data and OPEC’s cuts also positive

 

Despite signs that the Chinese economy’s growth is slowing in general, this morning’s release cheering oil bulls. Annual industrial production for November was up 6.2%, a very positive figure compared with the forecast of about 5% and the previous 4.7%. Greater production by Chinese industry usually drives the price of oil upward because it indicates higher demand in the future.

OPEC+’s commitment to further cuts is a less important factor but has had some effect recently. The cartel and its allies, most importantly Russia, announced last week that they would cut production of brent by another half a million barrels daily from the start of 2020. Although mainly a driver for brent rather than American oil, the latter benchmark has also felt a positive knock-on effect.

Part of the explanation for why crude hasn’t surged up more dramatically today is that American stocks remain high. A gain of 822,000 barrels last week according to the EIA isn’t exactly a huge surge, but it comes in the context of stocks consistently increasing for much of the third and fourth quarters of 2019.

Stocks and details of the agreement in focus

 

Tomorrow night’s data then on stocks from the API is the first of this week’s two key releases for crude oil. Change in stocks increased last week to 1.41 barrels per million, so many bulls will be looking for a drop back into negative territory or at least a slight drop from this figure.

Nevertheless, the EIA’s data on Wednesday night is the key weekly figure for crude oil. There is no consensus estimate at the time of writing, but the previous figure of 822,000 would probably be the upper limit for a reasonably positive release. Traders should remember that any effect from the first phrase trade deal will only be visible on Friday 27 December because of the delay in the data and Christmas and St Stephen’s Day on 25 and 26 December.

Finally and perhaps most importantly, traders will be analysing comments from the USA and China’s negotiators carefully over the next few days. A phase one deal is good news, but for it to be an ongoing positive, markets need to have some details on what exactly it involves and when its provisions will take effect.

Oil set for more small gains

 

Fundamentals in general suggest oil might continue to make some gains this week. It’d be unreasonable to expect much detail on the trade deal at this stage, but it’s possible that stock data tomorrow and Wednesday could scupper the latest upward movement.

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