U.S. West Texas Intermediate and international Brent crude oil finished lower last, weakened by concerns over rising U.S. production, but ultimately driven lower by worries over the impact of the escalating impact of the developing trade war between the United States and China.
A combination of news events helped fuel a two-sided trade before the market turned decisively lower for the week.
Prices plunged at mid-week after China proposed a broad range of tariffs on U.S. goods that increased fears of a trade war. However, the market began to mount a comeback after the release of a friendly government inventories report and a massive turnaround in the U.S. stock market.
According to the U.S. Energy Information Administration, U.S. crude inventories fell by 4.6 million barrels in the week-ended March 30. Analysts were expecting an increase of 246,000 barrels.
The EIA data showed the drop in inventories was fueled by a rise in refinery crude runs which jumped by 141,000 barrels per day. Refinery utilization rates rose by 0.7 percentage points.
Gains may have been limited by a report of a 3.666 million barrel build at the Cushing, Oklahoma futures storage hub.
The market received additional support from a report showing OPEC oil production fell in March to an 11-month low due to declining Angolan exports, Libyan outages and a further slide in Venezuelan output.
The mid-week rally started to pick up steam on Thursday, bolstered by a further recovery in the U.S. stock market and Saudi Arabia’s unexpected price hike in crude prices. However, a stronger U.S. Dollar helped limit gains.
On Friday, the crude oil market fell sharply in reaction to the news that President Trump had ordered U.S. trade officials to consider an additional $100 billion in tariffs on China, escalating tensions with China. Investors also feared additional retaliation from China that may include a tariff on the U.S. oil imported by China.
Prices could fall early in the week in reaction to a rise in the U.S. weekly rig count and the lingering threat of additional tariffs from China.
On Friday, oilfield services firm Baker Hughes said the number of U.S. rigs drilling for crude rose by 11 to a total of 808 this week.
Prices may be pressured this week if traders decide to take protection against possible tariffs by China on imported U.S. crude oil.
U.S. crude was hit the hardest Friday on worries that China could impose counter tariffs on it. “China is the main importer (after Canada) of U.S. crude oil, to the tune of about 400,000 barrels per day,” Petromatrix said.
“If China was to impose counter tariffs on U.S. crude, it would become quickly very heavy for the U.S. supply and demand picture, resulting in U.S. crude oil price pressure that would have a negative impact on global oil prices.”
Additional factors that could have a bearish influence on prices are rising U.S. production and the possibility of weaker global economic growth. Short-covering could trigger a counter-trend rebound rally if China specifically says that it won’t touch crude oil, or if negotiations begin between China and the U.S. to settle the trade disputes. Supply-side issue amid a backdrop of falling inventories could also provide some support.
The traditional supply/demand fundamental news is mixed. However, the main determinant of the direction appears to be lower appetite for risky assets in response to worries over an escalating trade war between the United States and China.
Based on last week’s price action, it looks as if the direction of the crude oil market this week may be largely influenced by investor appetite for risk.
This article was originally posted on FX Empire
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