Energy

Trump/Xi Meeting Turns First Of Two Keys For Oil Markets


FILE – In this Nov. 9, 2017, file photo, U.S. President Donald Trump and Chinese President Xi Jinping participate in a welcome ceremony at the Great Hall of the People in Beijing, China. (AP Photo/Andrew Harnik, File)

ASSOCIATED PRESS

The successful outcome of U.S. President Donald Trump’s meeting at the G20 Summit with Chinese President Xi Jinping sends a key signal to crude markets when they open on Monday, and turns the oil industry’s spotlight to the OPEC+ meeting in Vienna on Monday and Tuesday.

Here are the highlights of what Presidents Trump and Xi agreed to in Japan on Saturday:

  • China will resume purchases of agricultural products, such as soybeans, from U.S. farmers;
  • American companies will now be allowed to resume selling most products to Chinese telecom giant Huawei Technologies. Commerce Secretary Wilbur Ross will have authority to restrict goods that relate to U.S. national security;
  • Trade negotiations will now resume at the point at which they stalled last month, before China attempted to walk several previously-made concessions back;
  • All U.S. tariffs on China – including the “enhanced” tariffs implemented after trade talks broke off – will remain in place.

The re-start of trade talks from this standpoint represents very big concessions made by China, while at the same time allowing the U.S. a great deal of room to make concessions of its own. Oil markets will likely read this all as a clear signal that both countries are serious about concluding a comprehensive agreement. This should in turn reduce concerns about the slowing of China’s economy, which has taken a big hit from the imposition of U.S. tariffs, and create optimism about future growth of crude oil demand.

Thus, the first key that oil markets had been hoping to see has been turned.

The stage is now set for the second big key: this week’s meeting of the OPEC+ countries in Vienna. This meeting among OPEC member nations and non-OPEC oil-producers like Russia and Mexico has been preceded by much speculation in the news media that the participants are ready to extend their export limitation agreement one more time, through the end of 2019. An extension is considered to be crucial by almost all analysts, given that the 1.2 million barrels of oil per day (bopd) reduction agreed-to last December expires on June 30. The release of that many additional barrels onto the market would more than offset any positive momentum in crude markets provided by the Trump/Xi agreement.

As reported by the New York Times, “Analysts at Barclays, an investment bank, said that unless the production cuts continue, the price for Brent crude, the international standard, could slide to the $50-a-barrel range from the current $66 a barrel.” A Brent price of $50/bbl would equate to a WTI price in the $42/bbl range, too low for many U.S. shale producers to remain profitable.

There has even been some speculation that OPEC+ will agree to implement further cuts to exports beyond the 1.2 million bopd they are seeking to extend. If that happens, it would most likely be because Saudi Arabia has agreed to bear the brunt of the additional reductions. The Saudis have already been holding back about three times the volume required of them under the agreement in order to support crude prices, and appear to have the most incentive to see the Brent price firm up above $70/bbl by the end of the year.

Of course, there is always the chance that some unseen fly in the ointment will arise over the next two days to prevent any new agreement from taking place. Were that to happen, all bets on the direction of oil prices would be placed on a big drop.

So, the first key has been turned in Japan, and the second key awaits in Vienna. Everyone in the industry will be holding their breath waiting to see if it gets turned as well.

Interesting times.

 





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