U.S. West Texas Intermediate and international-benchmark Brent crude oil futures posted a two-sided trade on Friday but still managed to hold on to its weekly gains. There wasn’t a particular event driving prices lower, but traders seemed to think it was related to U.S.-China trade tensions, despite the announcement earlier in the week of a resumption of trade talks in early October.
Today’s selling pressure actually began late Thursday following the release of bullish inventories data from the U.S. Energy Information Administration (EIA) and a change in trend to up for the first time in weeks. In hindsight, I don’t think the move was anything but profit-taking. It also served as a sign that given the general tensions in the market over future demand, traders are a little tentative about buying strength at current price levels, and may actually prefer to buy breaks into value areas.
As Stephen Brennock, of oil broker PVM put it, “There is still no getting away from lingering demand-side concerns. Consequently, any looming upside potential will be built on wobbly foundations so long as the U.S. and China continue to do battle on the trade front.”
That pretty much sums up the price action on Friday. Without a solid fundamental support base, it will be hard to establish a prolonged rally. So traders are going to have to get used to back and forth trading over the near-term.
There is definitely an upbeat tone in the markets brought on by potential U.S.-China trade talks, however, traders are still going to be tentative about playing the upside too aggressively until there is real progress toward a trade deal and they see an improvement in the demand outlook, which is pretty bleak at this time.
One key fundamental event that has to continue in order to maintain any hope of an upside bias, is falling U.S. inventories. This week, crude stocks dropped 4.8 million barrels, nearly double analyst expectations, to 423 million barrels, their lowest levels since last year. This was the third consecutive weekly drop. It also came about despite a jump in imports.
Another supportive factor is the OPEC-led supply cuts. Saudi Arabia is going to have to hold the group together because the cuts in output are essentially driving U.S. inventories lower. Any signs that Russia or other allies are boosting production would produce put a lid on any rally.
This article was originally posted on FX Empire
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