Why oil traders are more bullish on 2020

Optimism among oil traders is rising despite mixed signals from the world’s top oil consumers, largely thanks to signs that pressure is easing between Washington and Beijing and the latter’s record-breaking oil imports.

Brent crude and West Texas Intermediate have both been on a more or less steady rise for about four weeks now. During that period, OPEC+ agreed to deepen its production cuts by half a million bpd, China continued importing crude at record-breaking rates, and US industrial production rebounded in November.

While not everyone was convinced that the deeper cuts will make much of a difference if not everyone in OPEC and outside it complies with their new quotas, the fact of the announcement of additional cuts must have made the right impression. That’s despite a warning from the International Energy Agency that next year the global oil market could swing into oversupply.

Meanwhile, China reported yet another record-breaking month of oil imports: the average daily for November was 11.18 million bpd, which, according to Bloomberg, was unprecedented. This was largely thanks to the ramp-up of two new refineries with a combined capacity of almost 900,000 bpd, but also because of signs of thawing between the US and China.

The two have been cautiously getting closer to a preliminary deal despite setbacks. The latest from President Trump on the topic was that the parties are almost done with the so-called “phase-one” deal, and all that remains is for it to be translated. 

"I said make sure you have the right translators because you can lose a lot with bad translation. So we're working on getting that done," Trump said, as quoted by CNN.

While translators are working on the document, the US administration is focusing on the economy. As Reuters’ John Kemp pointed out in his latest column on prices, this year the Fed cut interest rates by as much as 75 basis points to sustain growth and spur it on. The latest data in jobs and industrial production is encouraging for oil demand.

Payrolls in November shot up by 266,000, beating analyst expectations of 187,000 new additions, and industrial activity inched up by 1.1 percent last month after a fall of 0.7 percent in October. However, it bears noting here that the expectation-beating November figure was the result mainly of a pick-up in the carmaking industry after the six-week strike of UAW workers for GM.

Industrial activity data from China added to the optimism about the immediate future of oil demand. Like the US November figures, those for China exceeded expectations. The combined positive effect of US and China data offset bad economic news from India, where industrial activity shrunk by 3.8 percent in November. Eurozone industrial activity also fell, but that region is not among the top oil consumers, and economic updates are not high on the watch-out-for agenda of oil traders. 

In further good news for oil bulls, as Reuters’ Kemp noted in his column, the governments of China and India have set up economic stimulus packages, whose effect on oil demand will be certainly positive. Even the German government is considering economic stimulus after a contraction earlier this year.

No wonder, then, that hedge fund managers are increasing their bullish bets on oil—to almost 320 million barrels since mid-October, according to Kemp—and that investment banks are raising their price forecasts.

Goldman Sachs said last week it now expected Brent crude to average $63 per barrel in 2020, with West Texas Intermediate seen at $58.50 per barrel. The so-called long-term anchor price for Brent was set at $55 per barrel, with WTI pegged at $50 per barrel.

Then yesterday JP Morgan followed suit, raising its Brent crude forecast to $64.50 a barrel, up from $59 per barrel, and its WTI forecast to $60 per barrel. The bank even expects the oil market to swing into a deficit of some 200,000 bpd.

The thing to bear in mind, however, is that this optimism is fragile. Any piece of bad news regarding oil consumption in any of the top consumers and importers will pressure prices. So would any bad news about supply, as the latest API weekly inventory report proved yet again yesterday.

This article was originally published on Oilprice.com