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Crude oil stuck with supply and demand both challenged

Commodities 5 minutes to read
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  The Venezuelan political crisis as well as a Saudi pledge to lower output further should have boosted crude oil, but pulling in the opposite direction are heightened concerns about global growth, particularly that of China.

During the past few days crude oil has been presented with plenty of reasons to resume the rally that stalled in recent weeks.  Crude oil production in Venezuela, and especially exports to the US, are expected to drop in response to the growing political crisis and the US implementing new sanctions against its state-run oil company, PDVSA. Additional updates on the sanctions and its potential impact can be found here from Reuters and S&P Global Platts.

Adding to the support has been a pledge from Saudi’s oil minister Falih to make even deeper cuts in February below the voluntary 10.3 million barrels/day production cap recently agreed with the Opec+ group of producers.
Venezuela, Saudi
Instead of focusing on emerging supply risks, crude oil instead dropped the most in a month yesterday as macroeconomic concerns continued to raise concerns about a not yet realised slowdown in demand. Once again these concerns involved China given the current weakness being recorded in economic data and in earnings from companies doing business in China.

Disappointing earnings from Caterpillar Inc. (heavy machinery) to Nvidia Corp (computer chips) were both blamed on a sudden slowdown in demand from China, a country which accounts for a major share of global oil demand growth and which contributes about a third of global growth. 

On Wednesday high level trade talks between China and US will resume in Washington. Tensions, however, worsened yesterday after US prosecutors filed criminal charges against China’s Huawei. In addition the US may on the same day file a formal extradition request to Canada for Huawei’s CFO Meng Wanzhou, the daughter of the company’s founder. 

These macroeconomic and geopolitical developments continue to support an elevated correlation between crude oil and the S&P 500 index, a proxy for growth expectations. 
Rolling 30 correlations
The above-mentioned developments highlights why the oil market remains range-bound with the focus evenly split between supply and demand concerns. However, not all oils are equal and the prospect of lower supply of heavy barrels from Venezuela has supported a pick-up in the price of heavy crude oil varieties from Mexico and Canada. 

Brent and WTI crude oil meanwhile remain stuck in their established ranges with plenty of potential market moving events presenting themselves over the next 48 hours. The three most important are US-China trade talks in Washington, EIA’s weekly stock report and the Federal Open Market Committee meeting.
price chart
Source: Saxo Bank

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