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Sun 8 Dec 2019 07:51 AM

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All eyes on US-China trade negotiations as oil price hangs in balance

Just a week to go before US President Donald Trump decides whether to put further tariffs on Chinese goods

All eyes on US-China trade negotiations as oil price hangs in balance

Jameel Ahmad, global head, currency strategy and market research, FXTM.

Oil prices enjoyed a positive conclusion to the trading week ending December 6, with WTI Oil and Brent Crude appreciating by 1.32 percent and 1.58 percent respectively on Friday alone, following the outcome of the latest OPEC meeting in Vienna.

OPEC members and its allies (OPEC+) agreed to curb an extra 500,000 barrels per day (bpd) of oil production from next year. In addition, it has been widely reported that Saudi Arabia has voluntarily pledged to cut an extra 400,000 barrels per day in a further attempt to support higher prices.

The OPEC alliance’s commitment altogether represents the total production cut to be around 2.1 million bpd, which is speculated to equate to roughly 2 percent of global demand. Positivity around the OPEC meeting overall encouraged both WTI and Brent Crude prices to appreciate by close to $5 during the course of the week, with WTI advancing from $55.40 to $59.70 and Brent Crude rallying from $60 to $64.45.

In spite of some very positive news coming out of oil-related stories, questions will remain over how much higher oil prices can advance, despite the tremendous and ongoing effort by OPEC+ to announce and commit to deeper-than-expected production cuts.

Shale

Rising US Shale production is showing no signs of tailing away and continues to pose a high risk to combating the efforts from the OPEC alliance to prevent an oversupply in the market. US President Donald Trump has also repeatedly highlighted his stance in the past that oil prices should stay lower for longer and now that oil prices have enjoyed at least a muted advance, US Shale producers might find encouragement to increase their own production capacity.

Additionally, both WTI and Brent Crude prices are edging close to technical resistant levels that have acted as a wall preventing further advances since September 2019. For WTI this can be seen at $60 and Brent Crude just below $65.

The largest and most significant single driver for all financial asset classes for next week will be the outcome of US-China trade negotiations, where the clock is ticking to just over one week until the December 15 deadline for President Trump to decide whether to put further tariffs on Chinese goods.

As each day goes past without the US and China announcing some sort of agreement or another temporary truce, anxiety will increase that trade relations between the world’s two largest economies will continue to deteriorate. For oil, the outcome to these talks is extremely important as an escalation in trade disputes will hurt global GDP sentiment, and in turn create renewed concerns that demand for oil will face downward revisions as a result of a slowing global economy.

It was only late November that the OECD revised world growth expectations for 2019 and 2020 to the lowest level seen since pre-2010 at 2.9 percent, with US-China trade concerns cited as one of the major factors behind the pessimistic expectations and similar announcements from other institutions like the IMF, World Bank will be inevitable should the US-China trade war take a turn for the worse.

Jameel Ahmad, global head, currency strategy and market research, FXTM