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Crude oil outlook still cautious despite output cuts

Weak refinery margins continued to create doubts over demand for crude as all regions saw margins grinding lower.

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Last Updated: Dec 17, 2019, 09.10 PM IST
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Crude oil market turned bullish along with other commodities, benefitting from initial optimism over phase one trade deal between the US and China.

Still uncertainty remained as markets needed clarity on what exactly the deal entailed. The longer market have to wait for details, the more likely participants will start to question how good the deal actually is.

On the demand front, weak refinery margins continued to create doubts over demand for crude as all regions saw margins grinding lower, with Asia seeing negative margins, while in North-West Europe, margins are flirting with the negative territory.

The latest CFCT data showed a speculative net long in ICE Brent increased by 42,885 lots over the last reporting week to total 373,843 lots as of last Tuesday - the largest net long position speculators have held in ICE Brent since May.

The dollar index fell 0.23 per cent on Friday, led by gains in the British pound. The dollar, generally, spent the day on the back foot, as the initial rise in US bond yields unwound. With more concrete details of the interim trade-deal released from both sides, the dollar struggled versus emerging market currencies.

Saudi Aramco meanwhile got off to a flying start on its debut, rising 10 per cent within minutes of opening, the maximum allowed by the Tadawul exchange in Riyadh. Suspended at 35.20 riyals a share, the company had a market valuation of $1.88 trillion, over 30% more than Microsoft and Apple and less than 6% shy of the magical $2 trillion.

The news is hardly a surprise, though, given how tightly the offering has been stage-managed, and western institutional investors are unlikely to regret baulking at the $2 trillion price tag. Nor should retail investors outside the kingdom be too upset at being effectively denied the opportunity.

Elsewhere, in IEA monthly report, the group reported that global inventories will rise in the first quarter of 2020 despite Opec+ cuts. IEA trimmed its forecast for Non-Opec supply growth by 2,00,000 bpd to 2.1 Mbpd and kept demand outlook unchanged. It reported that the US is likely to become a net exporter by late 2020. In its year-end Short-Term Energy Outlook released last week, the US EIA forecast that Brent spot prices will be lower on average in 2020 than in 2019 due to forecast of rising global oil inventories, particularly in the first half of next year.

Data and trade war updates
The US will halve the tariffs on products worth $110 billion from 15 per cent to 7.5 per cent, but keeps 25 per cent tariffs on $250 billion of Chinese imports. According to China, the deal would encompass nine chapters with structural reforms including the protection of intellectual property and foreign exchange policy.

It was also being suggested by earlier reports that China would commit to importing an extra $50 billion of US agricultural products. This number has not been confirmed yet by Chinese officials.

Uncertainty exists as although there is an agreement on text, the legal text is still to be drafted, which could create problems. This phase one deal does not include the most sensitive topics, so considerable hurdles remain for a full deal that resolves the trade war. Sensitive issues such as indirect Chinese state subsidies and US' wish that China lets go of its ambition to dominate tech markets have been left for a phase two deal.

Now, the actual worries might come as negotiating a phase two deal, which is acceptable to both sides on these issues is very difficult because both parties are poles apart on these issues.

The more robust talks are to come in 2020, but that is a story for next year. It is a big win for Trump amongst some important rural and manufacturing constituencies with an election year ahead. Some doubt has been expressed about how China will import that much food in dollar terms.

Inventories and rigs
1. Crude inventory +8,00,000 barrels vs -2.8 Mbpd expected
2. Gasoline +5.54M vs +3.4M expected
3. Distillate +4.1M vs +3.1 M expected
4. Rig count increased by 4, first increase since October.

Conclusion
The oil market should remain cautious as there are problems in details of trade deal that could encourage investors to book profit as the price action on Friday suggested it may have already been priced into the market. If the deal is accepted by traders, then this, along with the outcome of the UK general election, should begin to fuel a rebound in global manufacturing which should lift oil demand in the long-run.

(Investors are advised to consult financial advisers before taking an investment calls based on these observations)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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