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China’s purchases coupled with OPEC’s decision to cut down production ‘kept crude oil tethered’: Expert

Bill Baruch, Blue Line Futures President, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the crude oil market.

Video Transcript

BRIAN SOZZI: It's been a wild week in the oil patch. West Texas Crude is back near $41 a barrel after starting the week around $37. It's about a 10% swing, and there could be more big moves ahead. Bill Baruch, the president of Blue Line Futures, is with us now.

Bill, is one of the big takeaways from these swings this week that the global economic recovery is just not perhaps as strong as a lot of people in the market expect.

BILL BARUCH: Well, we've seen the economic data start to recover. But from such dismal levels. It is giving a bit of hope. Now talking about oil and more particularly, we've seen China make just tremendous amount of purchases through the spring and through the summer that really buoyed this market.

That, coupled with the maneuvers by OPEC to bring down production, all of that had really kept crude oil tethered at a time for $42, $43 before the fallout two weeks ago, and a little bit of risk off.

Now to understand today's rip higher, or the rip higher back up this week, obviously the OPEC had a JMMC meeting. And then there were some pretty strong comments from Saudi Arabia. But one thing that they really quietly went unnoticed was a tremendous technical level.

Getting hit, just-- which stood just below $36. $36 was the low, and buyers really kind of came in there in front of that to keep the market propped up. There is, to your point, the weaker economic recovery.

But I think what really kind of hangs in the balance is going forward, do we continue to see lockdowns, or really continued virus outbreak, and that really hurts the demand picture going out six months from now?

ALEXIS CHRISTOFOROUS: You know, Bill, we saw Libya say that it's going to start to reopen its ports. You've got Saudi Arabia cutting its prices. These two are aggressively trying to gain market share. What does mean for US oil companies? Is it is it going to be a tough road ahead for them?

BILL BARUCH: Well, one of the things that they did give WTI some solid strength in August was the hope that China was going to reset new record purchases of US oil. Now at that time, the US dollar was-- and it still is with-- at two year lows.

A weaker US dollar makes exports from the US, or for other countries to import US products, much cheaper for them. So really, I think it depends what the US dollar does. I think that's quietly in the balance here for a number of asset classes. From equity markets, to crude oil, to even the agriculture markets.

And a lot of that, too, is then tied to China, what is China doing? Because last week, they said they wanted to increase energy purchases. They want to increase metals, and they also want to increase foreign purchases. We saw a lot of the metals have some pretty strong moves that last week that have been faded.

We've seen the agriculture markets, such as soybeans, just as a rocket ship higher. So I think a lot we have to focus on is where does the demand picture come from? And does COVID-19 over the coming months, does that affect that? What does the US dollar do? And then what is the US and China relationship moving forward?

BRIAN SOZZI: Bill, in the 30 seconds we have left here, we saw Saudi Prince Abdul Aziz really tread short sellers, oil short sellers in the market. Are you seeing short selling increase?

BILL BARUCH: Well you know, I think to this, the point here is we've seen up until this move [? to a ?] washout last week, and through this week, the market was actually pretty heavily favored to the long side.

Speculators where we're just sitting comfortably on the long side. And that, when you get a move lower like that, is exacerbated because those longs are then liquidating

I think they're really trying to potentially cover up a fear of under compliance for the production cuts. So they had this extraordinary meeting, that was that-- they called it. And then they made those harsh comments yesterday.

Pumped the price up, but what did we see coming out of this? Is that Iraq over produced pretty steadily? Does the UAE overproduce? Both those countries have been overproducing. And then do others follow.

So are they losing some of that controlled OPEC. And are they covering it up by the strongly worded comments?

BRIAN SOZZI: All right, let's leave it there. Bill Baruch, president of Blue Line Futures. Always good to see. You have a great weekend.

BILL BARUCH: Thank you.