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What Would It Take To Rally Oil Prices?

By Investing.com (Ellen R. Wald, Ph.D.)Oct 17, 2019 11:25AM ET
www.investing.com/analysis/what-would-it-take-to-rally-oil-prices-200474321
What Would It Take To Rally Oil Prices?
By Investing.com (Ellen R. Wald, Ph.D.)   |  Oct 17, 2019 11:25AM ET
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When U.S. President Donald Trump announced that trade negotiations with China were progressing well via Twitter Oct. 11, oil markets reacted swiftly. By 2:00 pm, they'd gained 1.5% and then, news broke that negotiators came to a partial agreement to ease the trade war and set the stage for further negotiations.

According to the President, the initial deal made last Friday will need to be followed up with a “phase one” agreement that will be hammered out in the next three weeks.

WTI Hourly Chart
WTI Hourly Chart

Oil markets were clearly excited at the prospect of progress towards a trade deal, as well as Trump’s statement that the U.S. would suspend its plans to raise tariffs from 25% to 30% on $250 billion worth of Chinese products this week. In fact, Brent closed above the $60 per barrel mark on Friday.

Economic Data Weighs On Oil Prices

However, by Tuesday, oil markets were much less impressed with the progress made in the U.S.-China trade relationship. The week opened with customs data from China revealing that imports dropped for the fifth straight month. Data on the corporate profitability of Chinese factories also showed a drop.

Apparently, the early stage trade agreement with China was not enough to keep oil markets happy in the face of more negative economic data, as Brent fell 1.15% and WTI fell 1.5%.

Brent Hourly Chart
Brent Hourly Chart

WTI dropped again on Wednesday after data from API—which was released a day late due to observance of the Columbus Day holiday in the U.S. on Monday—showed a significant increase in crude oil storage in the U.S. (over 10 million barrels). However, the decline which was only about 0.3%, revealed skepticism that the EIA data will present such a large build in crude oil storage when they are released on Thursday.

The market's quick reversal after the initial elation from the U.S.-China trade progress news begs the question: what would it take to bring a sustained rally in today’s oil market prices?

Prerequisites For Enduring Rally

Geopolitically, that question was answered in September, when Aramco’s quick recovery from the attack on its oil facilities brought oil prices back from their $9 jump in just two weeks. It would probably take a full-scale war in the Persian Gulf with aerial bombing of oil facilities to bring about a prolonged increase in oil prices. Even the ongoing small-scale strikes on oil tankers in the Persian Gulf—and now the Red Sea—have only fleeeting impacts on oil prices.

In the United States, a fracking ban, in line with what Democratic presidential candidate Elizabeth Warren advocated, could curb oil and gas production in the United States to an extent that would push oil prices up in a sustained way. This scenario, like the all-out war situation described above, are unlikely prospects.

A more probable possibility that could materialize in the next three weeks is a first stage trade agreement between the U.S. and China. This would, of course, need to be followed up with further negotiations for an even more comprehensive trade agreement, but would be a concrete sign that trade relations between the two largest economies in the world are taking real steps toward normalization.

Another development that would rally oil prices is a mutual Brexit agreement between Britain and the European Union. Oil prices would react positively to the end of the economic uncertainty of the unresolved Brexit situation.

What Would It Take To Rally Oil Prices?
 
What Would It Take To Rally Oil Prices?

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ugur timsah
ugur timsah Oct 17, 2019 10:02AM ET
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nothing can improve oil price. the new normal for short term should be btw 40-50$/barrel for brent and 20-30$/bbl for mid-term. price above 60 is highly artificial
GQED Grant
GQED507 Oct 17, 2019 9:53AM ET
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As it is there is plenty of oil around and demand is not getting higher. Peace on earth is not a good ally of oil price. To make it high make it scarce again and again by whatever it takes. The scarier the higher the price will go higher. Not few organization or country is afraid to make oil scarce on world market.
Dino Casseli
Dino Casseli Oct 17, 2019 9:16AM ET
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What would it take for the oil prices to get back up to the reasonable price? (1) Impartiality from EIA and IEA. (2) Easing of the deluge of "waves of new supply" and death of demand fairy tales in the everyday media. Negative information, driving the oil prices and investment, will eventually ***the golden goose.
Arthur Lynn
Hoppel Oct 17, 2019 8:14AM ET
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Thank you for your analysis.
Andrew carson
Andrew carson Oct 17, 2019 7:57AM ET
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API and EIA should provide more insight in their reports rather than just dropping numbers essentially. Sanctions, refinery utilization, storms, shipping...
 
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