Crude oil stuck with supply and demand both challenged
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.
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.
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.
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.