Oil bulls gearing up for a rally, but Trump may play spoilsport

Oil traders should remain cautious and not get too carried away by the Opec+ saga​.

Crude oil prices rallied on Friday and touched 12-week high after Opec, Russia and nine other allies agreed to deepen output cuts by 503,000 barrels per day (bpd) to 1.7 million bpd from January through March. Saudi Arabia took it even further, declaring it would voluntarily slash another 400,000 bpd beyond its new quota. The energy alliance has said it plans to review the policy at an extraordinary meeting on March 5-6 next year.

Dollar strengthened meanwhile, snapping five straight days of losses, as data showing the US economy creating far more jobs than forecast at the fastest pace in 10 months in November underlined expectations for the Fed to hold steady after cutting rates three times this year. The number of Americans filing applications for unemployment benefits unexpectedly fell last week, hitting their lowest level in seven months, suggesting the labour market remained solid even as the economy was slowing.

On the other hand, manufacturing activity contracted for a fourth month in a row in November.

China data and trade war updates
China's crude oil imports rose 6.7 per cent to hit a historical high at 11.18 mbpd in November, crossing the 11 mbpd mark for the first time. The strong growth was partly due to high throughput at the refineries amid historically high crude imports, while domestic product demand started to weaken after the peak season in September-October. China in fact saw its crude imports from Saudi Arabia surge 76 per cent year on year and 17.4 per cent month on month to a new high of 1.99 million bpd in October.

Meanwhile, China has ordered all government offices and public institutions to remove foreign computer equipment and software within three years in a potentially stinging blow to US computer makers such as Dell, HP and Microsoft, and an ominous development for all those who think the US-China trade war is about to come to an end.

The US technology companies generate as much as $150 billion a year in revenue from China, although much of that will come from private sector buyers. Still, it's probably just a matter of time before Beijing expands the rule to all Chinese organisations. But reports say that it will be difficult to replace software with domestic alternatives, since most software vendors develop products for US-made operating systems.

Inventories and rig
1. Crude Inventory -4.86 million barrels vs -1.49 million expected

2. Cushing -302,000

3. Gasoline +3.39 million vs +1.47 million expected

4. Distillate +3.06 million vs 327,000 expected

5. Rig count: Fell by 3

Opec meet
Saudi Arabia minister surprised markets with stating that Saudi quota would be an additional 167,000 bpd. He also said that the Kingdom would continue to exceed its quota by 400,000 barrels a day, which means the overall production cut will actually be closer to 2.1 Mbpd. Under the new deal, Opec agreed to 372,000 bpd in fresh cuts and non-Opec producers - mostly Russia - an extra 131,000 bpd. Russian quota would be 300,000 bpd during the first three months of 2020, which excluded condensates. While the cut looks good for the market on paper, the devil is in the details -- specifically how many additional barrels will come to the market.

The deal expires at the end of March, right in the middle of what looks to be a tricky patch for the oil market. Demand growth is slowing and another big expansion in rival production is coming down the pipeline and there is a probability of Opec to increase production in the second half.

Key concern is whether other countries will comply with the output agreement and will Saudi only bear the output cut to boost Aramco IPO. Saudis need prices at least $80 per barrel - $15 higher - to balance its budget, much higher than most other producers.

Aramco priced its IPO at 32 riyals ($8.53) per share, the top of its indicative range, which puts the company on track to raise $25.6 billion. The long-awaited IPO of the world’s largest and most profitable company will list locally on Tadawul, Saudi Arabia’s stock exchange on December 11, and forms the centerpiece of Crown Prince Mohammed bin Salman’s Vision 2030 aimed at transforming the Saudi economy.

Saudi is expecting the IPO to fetch $2 trillion valuation after deeper cuts. Overall, the output cut looks good for markets, but it remains unclear what would occur in 2o20, potentially reflecting Saudi's new stance that they could walk away from this deal if other countries did not comply fully.

For 2020, the output cut will bring a balance in market and support prices, but it won't be taken well by the US ahead of their elections and we might experience release of SPR USA and giving shale operators government backed loans just like farmers as Donald Trump won't allow oil to go up in price prior to elections.

Overall, the net impact may down the drain as the new cuts merely offset expected increases from non-Opec nations, including top producer US, where shale producers are pumping oil at an unprofitable yet record pace, in order to stave of defaults and adjustment cannot really be interpreted as something that effectively change the expected oil balance as its more of a compliance maneuver ’s and a rollover for everyone but Iraq and Nigeria and an effort to distribute the Saudi over-compliance that has been in place since about April to other Opec+ members.

Natural Gas
Prices saw a gap down opening as weather forecast on Sunday for a warmer forecast for the next week. Inventories showed a drawdown of 19 Bcf last week, falling by less than half of the five-year average, which was much lower than market expectations and increased worries of demand slowdown for Natural gas. CFTC showed money manager short positions surged by 49,874 contracts last week. About 75.2 per cent of all investor contracts are held short, a new 2019 high and the highest since at least 2013, an historically overcrowded short trade.

Weekly events
Interest rate calls by the US Federal Reserve and the European Central Bank will keep investors preoccupied this week, along with the UK general election that will determine the course of Brexit. Market will also be watching for headlines from Trump's global trade war ahead of the looming December 15 deadline for a fresh tranche of US tariffs on Chinese imports.

Conclusion
Market should remain cautious and not get too carried away by the Opec+ saga as Trump will negate any effect on crude oil prices by releasing crude reserves, limiting export, giving shale operators government backed loans just like farmers as US president’s dislike for high fuel prices, especially in a year that he’ll be seeking reelection.

Markets will still remain supported for this week if EIA confirms the drawdown along with Opec+ decision.

(Investors are advised to consult financial advisers before taking an investment calls based on these observations)