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Oil at a crossroads on US-China trade talks

The global business cycle is at a key junction at this point in time, which will dictate oil prices in the near future. Due to global downturn fears, Brent could plunge to $50 a barrel but a US-China trade deal would surprise the market and could lift oil to $90 a barrel, analysts said.

No high-level talks between the United States and China have been scheduled since the last round of negotiations in Washington two weeks ago.

Trump said late on Thursday that he saw a resolution to the trade war with China “happening fast”. The US president said that Huawei Technologies, which the White House has blacklisted, could also be included in a trade deal.

“In our view, the global business cycle is at a key junction. Weakness in manufacturing may drag down services if trade wars eventually hurt consumer sentiment. In a global downturn, Brent could slip to $50 a barrel. On the other hand, under a US-China deal scenario, business confidence may return with a vengeance, resulting in a weaker US dollar and stronger global growth. If a cyclical global demand upturn coincides with an IMO 2020 boost, Brent crude oil prices could spike to $90 per barrel,” said Bank of America-Merrill Lynch analysts.

Last week, oil prices posted their biggest weekly drop of the year due to rising inventories and global economic slowdown fears amidst US-China trade tariffs war concerns. Following a 5 per cent plunge in crude on Thursday, prices recovered on Friday as Brent gained 93¢ or 1.4 per cent to settle at $68.69 a barrel, while WTI rose 72¢ or 1.2 per cent to $58.63 a barrel.

Brent posted a weekly fall of about 4.5 per cent while WTI notched a weekly decline of about 6.4 per cent, its steepest since December 2018.

The prices hit a 2019 high of $75 a barrel in April, which saw prices going up 6.3 per cent compared to March 2019.

“US businesses affected by the increased tariffs will be making decisions regarding purchases, inventories, etc, that are apt to force some downshifts in the US economic growth path that could have implications for US oil demand,” said Jim Ritterbusch, president of Ritterbusch and Associates.

“A decline below our expected next support level of $56 [for WTI] will likely associate with a further plunge in equities that would be heavily related to unresolved trade issues between the US and China… volatility across all markets will be heightened until some significant trade progress is seen,” said Ritterbusch.

Naeem Aslam, chief market analyst at London-based TF Global Markets, said oil industry has been resilient to the trade war issues for long time because it is not that the trade war started only this week but the reason that investors didn’t pay too much attention to this was mainly due to the concerns over the supply disruptions and they really thought this trade war will not last that long.

“Investors aren’t concerned that the trade war is going to leave a major dent on the oil demand, after all we are talking about the two biggest economies of the world. If the business cycle starts to slow down here, it is going to have huge impact on oil demand and the fact is that the spillover effects of the business cycle in these countries also has an impact around the world,” said Aslam.

Dean Popplewell, analyst at Oanda, said oil prices remain under pressure amid surging US crude inventories and weak demand from refineries.

“Crude bears have been getting a helping hand from slowing demand growth due to the negative impact on the global economy of the Sino-US trade war,” he said.

By contrast, he said, “crude bulls have been relying on escalating political tensions between the US and Iran, as well as ongoing supply cuts led by Opec.”
Source: Khaleej Times

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