Trade talks, OPEC compliance and U.S. oil inventories will feature broadly in Oil patch discussion this week.
Coming off a tough week of trading WTI from the long side, last week ended on a more upbeat note as oil prices were boosted by a stellar U.S. job report, another fall in the U.S. rig count and US-China trade talks which continue to veer in a positive direction. Still, it’s the data that counts and traders will be looking towards key macro inflexion points, especially around forward-looking sentiment gauges, to gauge near-term oil market views.
Last Wednesday, oil came under pressure from a large U.S. inventory build and concerns about the US-China trade dispute.
As of the start of this week, trade talks are progressing smoothly and the phase one signing of a US-China trade deal may boost risk sentiment and improve overall business confidence. Still, in the absence of a rollback in a chunk of existing tariffs, it may only limit but not reverse the economic carnage that has resulted in the trade war, which could weigh on demand and keep prices depressed in the near term.
OPEC oil ministers continue to suggest Saudi Arabia is ready to agree to deeper production cuts.
It's not unusual to hear OPEC policy aired/debated in public ahead of an OPEC meeting. Still, with prices falling precipitously due to demand concerns, OPEC may be setting the stage and exhibiting a greater sense of urgency than usual.
Market sentiment on oil has been predominantly bearish for some time, but we see two essential factors limiting price downside. The first is OPEC supply cuts – OPEC may show supply restraint through 2020, with potentially deeper cuts at its December meeting.
The slowdown in U.S. onshore activity is a critical inventory correcting mechanism and could offer support for prices ahead of this week's essential U.S. inventory reports.
The latest U.S. oil industry production data not only shows the number of wells drilled in U.S. unconventional basins 13% below the 2018 average (HSBC), but that the U.S. rig count has declined for its third consecutive week and the total count is down a staggering 183 rigs from the same time last year (Baker Hughes).
Inventory data will be closely watched on two fronts. First to see if U.S. demand is starting to pick up but if US inventories continue to swell, it could bolster the prospect of deeper production cut at the OPEC meeting in December.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support