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Trade Fears Trump Output Cuts

Monday, Dec 9 2019
Market Talk

Trade fears are trumping output cuts to start the week, as oil prices retreat following a strong Friday rally. Customs data showing Chinese exports declined for a 4th straight month is getting credit for the early sell-off, erasing much of the post-OPEC gains that pushed prices near 2 month highs.

After OPEC uncertainty had oil prices selling off to start Friday’s session, a much more precise proclamation on output cuts in the official press release spurred on a buying spree mid-morning. By noting that the Saudi’s would continue their own voluntary output reductions, in addition to the group’s agreed-upon output cuts, should mean that around ½ million barrels/day (roughly ½ of 1% of total global supply) will be taken offline to start 2020. One thing the official announcement did not mention was if condensate would get different treatment than traditional crude grades, which could potentially leave a loop hole for Russia to export more barrels.

It’s a big week for markets globally as both the FOMC and ECB will hold their last meetings of the year, and another tariff deadline with China comes on Sunday. After Friday’s strong jobs report helped propel US stocks back near all-time highs, equities seem to be taking a wait-and-see approach to start this week with these major issues looming.

The CME’s Fedwatch tool shows a 99% probability of no interest rate action by the FED at this meeting and low odds of any action in the front half of 2020.

5 more oil rigs were taken off-line last week, according to Baker Hughes’ latest report. That’s the 7th consecutive weekly decline, and marks a 25% reduction in the total US count so far in 2019.

Money managers do not appear to have enjoyed the Black Friday selloff in energy contracts, and reduced their net-long holdings (bets on higher prices) across the board last week. Since that report’s data is compiled as of Tuesday, those that bailed out look like they missed the recovery rally in the back half of the week. RBOB contracts saw the largest reductions, perhaps an acknowledgement of the upcoming winter doldrums for gasoline demand.

From the OPEC Press Release Friday:

“The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb. This additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the DoC.”

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