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Crude oil (WTI/Dec) closed around 54.00 and made a low of around 53.73 in the early U.S. session Thursday, plunged almost -2.4% on the concern of supply glut amid U.S.-Canada/Marketlink pipeline disruption and renewed suspense U.S.-China trade deal coupled with slowing Chinese economy.
On late Wednesday, there was a report that TC energy (TCE), which carries around 590 kbpd of crude from Canada to refineries in the U.S. Midwest, would be out of service. The company said it was shutting its Keystone crude pipeline due to a spill in North Dakota without specifying any time period for the repair. Oil got some support on the lower Canadian oil supply.
But on Thursday, oil was also under stress on the concern of higher inventories at Cushing (OK) after some reports suggested that TCE’ 750 kbpd pipeline (called Marketlink), which carries oil from Cushing Oklahoma (OK) to Nederland (Texas) was operating at reduced rates as TCE shut its Keystone pipeline after founding a leak in North Dakota. Typically, it would take at least 7-10 days to repair such an oil pipeline leak.
Moreover, oil closed around 55.06 Wednesday, slumped almost -0.86% on surprised EIA/U.S. inventory additions and renewed suspense of Phase One China trade deal as Chile APEC summit canceled at which Trump and Xi were supposed to meet to sign the ‘historic’ tentative trade deal between U.S. and China.
Chile cited intense public protests in the country against surging cost of living (inflation) and alleged issues of inequality. Oil made a low of 54.42 Wednesday, but recovered slightly and closed around 55.06 on lower USD after ‘Goldilocks’ Fed rate cut and dovish remarks by ‘flexible’ Powell coupled with Keystone pipeline disruption.
Meanwhile, Chile’s cancellation of the APEC summit caught the White House by surprise. A Trump admin official said Washington learned about the decision from news reports and is seeking more information from Chilean authorities.
Although, U.S.-China Phase One deal signing could happen in either of the two countries U.S. and China directly, rather than in a 3rd country, the risk-on trade as-well-as oil slips on the headline as a further delay in U.S.-China tentative trade deal may cause more protracted synchronized global slowdown and demand for the ‘black gold’ (oil).
But the overall impact of much-awaited Chile APEC cancellation was limited as there was already a report late Tuesday on the renewed concern of a tentative Phase One trade deal between U.S. and China. There was a report that China and the U.S. might not sign a partial trade deal next month. This follows barely a day after Trump’s optimism (jawboning) that negotiations were ahead of schedule and he may sign the Phase One deal with Xi mid-Nov at Chile APEC meeting. But Trump also said that it’s not guaranteed and it would be ‘fine too’ if the deal was not finalized by the APEC summit.
On Wednesday, the White House Chief of Staff Mulvaney said: “We’re still working to get Trump-Xi summit on board”.
Earlier Thursday, China Commerce Ministry said: “China–U.S. trade teams are maintaining close communication and trade negotiations progressing well, will continue to proceed with negotiations according to the previous plan. And lead China, U.S. trade negotiators will hold a telephone call on Friday. President Xi and Trump have been maintaining contact through various means”.
Further, on Thursday, China’s twitter proxy, the GT editor tweeted: “Based on what I know, Chile canceling APEC summit will not affect arrangements of the China-U.S. trade talks. The talks are progressing smoothly and will move forward as planned”.
Also, China’s trade association chief said: “Beijing could remove extra tariffs on U.S. farm products to help importers buy up to $50 bln worth and such removing extra tariffs would let Chinese importers buy U.S. farm products based on market conditions”. As a pointer, China is not willing to buy excess U.S. farm products to the tune of $50B/pa as its far way than its actual requirement (demand).
On the other side, another report suggested that the U.S. is considering extending some Chinese tariff exclusions expiring Dec.28 and the USTR is seeking public comment on whether to extend some exclusions.
But on Thursday all the hopes and hypes of U.S.-China trade deal evaporated and risk-on trade as-well-as oil slumped on further suspense of U.S.-China trade truce after a report that China has doubts over the possibility of a long-term trade deal with the U.S. despite progress on an interim trade deal amid U.S. demand for so-called Chinese structural reform (intended to ‘change’ China).
China also reportedly blamed Trump’s impulsive (whimsical) nature and there is a risk that Trump may even back out of the limited deal at the last moment that both sides are about to sign in the coming weeks. This would be a major humiliation for China’s President Xi. Clearly, China does not trust the credibility of Trump and his ‘morning mood’. Chinese officials reported said: "Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks".
The report also suggested that Chinese officials have warned that they won't budge on structural issues either, and China is demanding an end to all types of additional Trump tariffs in order to begin any talks for ‘Phase Two’. The report also pointed out that this doesn't mean that a ‘Phase One’ deal is off the table but it certainly highlights that what both sides are working towards in November is essentially pointless overall. The trade/cold war is merely put on ice; (ceasefire), even after Phase one; it doesn't mean it is over.
The report also said:
Many senior Chinese officials quietly suspect that the Phase One partial trade deal will soon fall apart and that the odds of the two sides reaching a more comprehensive final deal are effectively zero. The so-called Phase One trade deal is Chinese purchases of US farm goods and other products such as aircraft. It’s also expected to include Chinese commitments to protect U.S. IP and an agreement by both sides not to manipulate their currencies. In return, Trump agreed to drop the planned October tariff hikes, while remaining open to dropping the December hike as well. Beijing would accept to move ahead with Phase 1 only if there is a commitment from the Americans to removing all tariffs in Phase 2 and agreeing to cancel the next round of tariffs, set to take effect in December.
China’s position is that tariffs don’t all have to be removed immediately, but they must be part of the next stage. China also wants Trump to cancel a new wave of import taxes due to take effect Dec. 15 on American consumer favorites such as smartphones and toys as part of the phase one deal.
While Beijing officially remains open to more talks, senior officials privately don't see much of a point. Many of the big structural changes that Washington is demanding are simply unacceptable to Beijing and have been since the beginning. With Washington refusing to budge on lifting all the new trade war tariffs, any big ‘asks’ will likely be ‘off the table, seeing as Beijing insists that removing all of the new tariffs be part of any final deal. Doing otherwise would simply be ‘politically unfeasible’ for Xi.
As a pointer, on early Thursday, the U.S. Secretary of State Mnuchin said the U.S. must engage with China without trying to ‘change’ the nation: “We accommodated China’s rise, in the hope that they would become freer (open) in response, but the CCP took advantage of our goodwill. Now, President Trump is facing the reality of CCP hostility to the U.S. and our values. We must engage China as it is, not as we wish it to be”.
In any way, on Thursday, in an apparent bid to recover Dow, the White House CEA Kudlow said: “U.S.-China trade talks are going smoothly”.
And Trump tweeted just 5-mins before the U.S. stock market opening, expressing renewed optimism about Phase One deal after cancellation of the APEC summit at Chile: “China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement, about 60% of total deal, after APEC in Chile was canceled to do unrelated circumstances. The new location will be announced soon. President Xi and President Trump will do signing!”
Further Trump blasted Fed/Powell, just a day after the U.S. Central bank cuts another -0.25% with an indication that the current easing cycle may be almost over. Trump is now trying to force the Fed to cut another -0.25% in Dec and thus creating uncertainty about Phase One deal.
“People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting...our manufacturers. We should have lower interest rates than Germany, Japan, and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway”.
On Thursday, the U.S. market as-well-as risk-on trade and oil was also under stress as Trump’s impeachment inquiry (proceedings) begins. As a pointer, Bolton, the former NSA and suspected witness (source) for the Ukraine whistleblower are also summoned by the U.S. Congress to testify. Trump tweeted: “The Impeachment Hoax is hurting our Stock Market. The Do-Nothing Democrats don’t care! The Greatest Witch Hunt In American History!”
On Wednesday, oil was also slumped after an unexpected U.S. inventory addition:
Now from Trump trade war politics to U.S. economics, the weekly EIA data shows that the U.S. crude oil inventories surged by +5.702 MB from the prior drawdown of -1.699 MB and far higher than the expectations of +0.494 addition (API: +0.592). The U.S. crude oil imports also jumped to +1.196 MB from a prior decline of -0.873 MB. The U.S. crude oil inventories also jumped to +1.572 MB from prior +1.506 MB. The EIA weekly distillates stocks dropped by -1.032 MB from the prior drawdown of -2.715 MB and were higher than the expectations of -2.350 MB.
The U.S. gasoline inventories dropped by -3.037 MB from the prior drawdown of -3.107 MB and were higher than the drawdown expectations of -2.185 MB. The EIA weekly refinery utilization rate came higher at +2.5% from prior +2.1%, and above the expectations of +0.7%.
Overall, all the major elements except U.S. gasoline inventories were negative and subsequently oil slips. The higher U.S inventory despite higher refinery utilization was due to higher imports from Canada coupled with some SPR release amid higher demand for heating oil in the forthcoming winter season. Another worrying factor was consistent build-up at Cushing (OK), the point of WTI future delivery.
On Thursday, oil was also under stress on the concern of the Chinese slowdown after another spate of subdued PMI data. China’s manufacturing PMI further contracted to 49.3 in Oct from prior 49.8, lower than the expectations of 49.9 and is in 6th straight months of contraction (below boom/bust line of 50.0). The non-manufacturing (service PMI) also dropped to 52.8 from prior 53.7, lower than the expectations of no change at 53.7.
Further Looking at some details, new export orders dropped for the 17th month to 47.0, down from 48.2, while employment improved slightly but remain deep in contraction at 47.3, up from prior 47.0. The overall set of data suggests that while China’s growth is already at the slowest pace in 30 years, there is no sign of a definitive rebound yet.
Oil was also under pressure on the concern of higher OPEC outputs in Oct led by a rapid recovery in Saudi Aramco (after the drone attack) despite some outage from Ecuador. Saudi Arabia has pumped 9.90 mbpd, up 8500 kbpd from September.
The OPEC has pumped 29.59 mbpd in Oct, higher by 690 kbpd from Sep’ revised figure, which was the lowest monthly total since 2011. The overall compliance has fallen to 140% in October due to the rise in Saudi output, from 222% in September. In early Oct, Ecuador halted crude sales because at least 20 fields suspended operations amid public protests against government austerity measures. But Venezuela managed to boost supply despite U.S. sanctions as a domestic refining complex resumed production and exports reportedly increased in October.
As a pointer, OPEC+ production cut agreement of 1.2 mbpd is valid up to March’20 and it will meet in early Dec’19 to decide about any deeper production cut agreement post March’20. Iran, Libya, and Venezuela are exempted from this production cut agreement among OPEC+ due to various geopolitical issues.
All focus maybe now on the Marketlink pipeline and trajectory of U.S.-China trade talks.
Technically, whatever may be the narrative, oil now has to sustain above 55.00 for a further rally to 55.50*/56.00-56.50*/57.05 and further to 57.80*/58.55-59.35/60.50 in the near term (under bullish case scenario).
On the flip side, sustaining below 54.80, the oil may fall to 53.85/53.15*-52.00/51.50 and further to 50.95*/50.00-49.40/46.85 in the near term (under bear case scenario).
Now oil needs to stay above 53.15; otherwise, it may fall further as per the above levels; for any rebound, oil now needs to stay above 54.50-55.00.
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