Oil prices recoil as specter of trade war, weaker demand haunts market

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Reuters
KEY POINTS
  • Brent futures were down 14 cents, or 0.2%, at $64.11 per barrel by 0450 GMT.
  • West Texas Intermediate oil futures were 13 cents, or 0.2%, lower to $58.89 a barrel.
  • The benchmarks fell 0.2% and 0.3% respectively on Monday.
GP: US Oil Workers Oil Boom in Texas's Permian Basin 191030
Workers extracting oil from oil wells in the Permian Basin in Midland, Texas on May 1, 2018.
Benjamin Lowy | Getty Images

Oil prices slipped on Tuesday for a second straight session as the cons of a slowing global demand outlook outweighed the pros of OPEC’s agreement with associated producers at the end of last week to deepen crude output cuts in early 2020.

Brent futures were down 14 cents, or 0.2%, at $64.11 per barrel by 0450 GMT. West Texas Intermediate oil futures were 13 cents, or 0.2%, lower to $58.89 a barrel. The benchmarks fell 0.2% and 0.3% respectively on Monday.

“The euphoria (on output cuts) was short lived, with an unexpected fall in exports from China highlighting the impact of the trade conflict,” said ANZ Bank in a note on Tuesday.

Data released on Sunday showed exports from China in November fell 1.1% from a year earlier, confounding expectations for a 1% rise in a Reuters poll.

That weakness came amid fresh fronts in the trade war between Washington and Beijing that has stymied global economic growth coming up fast: Washington’s next round of tariffs against some $156 billion Chinese goods are scheduled to take effect on Dec. 15.

U.S. President Donald Trump does not want to implement the next round of tariffs, U.S. Agriculture Secretary Sonny Perdue said on Monday — but he wants “movement” from China to avoid them.

“With the swathe of new tariffs due to kick in on 15 December, the market is watching negotiations closely,” said ANZ.

Analysts said that, though overshadowed for now, the move by “OPEC+” — the Organization of the Petroleum Exporting Countries (OPEC) and associated producers like Russia — to deepen output cuts from 1.2 million barrels per day (bpd) to 1.7 million bpd would remain a mid-term support factor.

But rising non-OPEC production threatens to counteract efforts to limit global crude supplies.

“Despite the voluntary restraint from OPEC, world oil markets remain well supplied … with non-OPEC output expected to rise by well over 2 million bpd next year, with big increases in the U.S., Brazil, and Norway,” said Henning Gloystein, director of global energy and natural resources at Eurasia Group in a note.

U.S. crude oil output recently hit a record of 13 million bpd and is expected to rise further in 2020.

“Going forward, oil prices are likely to be more data-driven, and move in tandem with demand forecasts,” said Margaret Yang, market analyst at CMC Markets.

Oil drops as market awaits ratification of OPEC+ supply cut

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Reuters
KEY POINTS
  • Brent futures were down 21 cents, or 0.3%, at $63.18 by 0258 GMT.
  • West Texas Intermediate oil futures fell 14 cents, or 0.2%, to $58.29 a barrel. They hit $59.12 a barrel on Thursday, the highest since the end of September.
Reusable: Texas oil production fracking worker cleans off truck 150204
A truck used to carry sand for fracking is washed in a truck stop in Odessa, Texas.
Getty Images

Oil slipped in early Asian trade on Friday, with U.S. crude moving further away from a two-month high after OPEC agreed to increase output curbs in early 2020 but failed to promise further steps after March.

Brent futures were down 21 cents, or 0.3%, at $63.18 by 0258 GMT.

West Texas Intermediate oil futures fell 14 cents, or 0.2%, to $58.29 a barrel. They hit $59.12 a barrel on Thursday, the highest since the end of September.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia – a grouping known as OPEC+ – agreed to more output cuts to avert oversupply early next year as economic growth stagnates amid the U.S.-China trade war.

The agreement, which needs to be formally adopted later on Friday, will cut an extra 500,000 barrels per day (bpd) of production, through tighter compliance and some adjustments. The group has been withholding 1.2 million bpd and the increased amount represents about 1.7% of global oil output.

The “decision seems to be more of a housekeeping move that will narrow the gap between their current target and the over-compliance we have seen from the alliance,” said Edward Moya senior market analyst at OANDA.

A panel of ministers representing OPEC and non-OPEC producers led by Russia recommended the cuts, according to Russian Energy Minister Alexander Novak on Thursday.

Details need to be hammered out at an OPEC+ meeting that starts later on Friday in Vienna.

Any price gains from the OPEC+ output cut are likely to benefit American producers not party to any supply curbing agreement. American drillers have been breaking production records even as they cut the number of oil rigs in operation, filling gaps in global supplies.

“North American shale supply will continue growing even in an environment with lower oil prices,” Rystad Energy said in a note.

Higher oil prices are also supporting the initial public offering of Saudi Arabia’s state-owned oil company, Saudi Aramco, which priced its shares on Thursday at the top of an indicated range.

The sale was the world’s biggest IPO, beating Alibaba Group Holdings’ $25 billion listing in 2014, but fell short of valuing Aramco at $2 trillion, a target sought by Saudi Crown Prince Mohammed bin Salman.

Foreign investors stayed away and the sale was restricted to Saudi individuals and regional investors.

Oil rises before OPEC+ meet, lifted by drop in US crude stocks

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Reuters
KEY POINTS
  • Brent crude futures were up 35 cents, or 0.6%, at $61.17 a barrel by 0246 GMT.
  • U.S. West Texas Intermediate (WTI) crude futures were up by 31 cents, or 0.6%, at $56.41.
GP: Azerbaijan Oil Industry 191008
Azeri oil workers operate a large field of drilling rigs on October 12, 2003 outside the capital city of Baku, Azerbaijan.
Oleg Nikishin | Getty Images

Oil prices rose on Wednesday ahead of a meeting of OPEC and its allies to discuss whether to extend production curbs to support the market, while industry data showing that U.S. crude stockpiles fell more than expected helped to lift prices.

Brent crude futures were up 35 cents, or 0.6%, at $61.17 a barrel by 0246 GMT.

U.S. West Texas Intermediate (WTI) crude futures were up by 31 cents, or 0.6%, at $56.41.

The Organization of the Petroleum Exporting Countries (OPEC) and allies that include Russia — a group known as OPEC+ — are preparing to approve deeper crude output cuts this week, when they meet in Vienna, according to Iraq, the group’s second-biggest producer.

Thamer Ghadhban, the oil minister of Iraq, told reporters on Tuesday in Vienna that “a deeper cut is being preferred by a number of key members.”

There is still some skepticism in the market over whether OPEC will cut output further, however, with many analysts expecting only an extension of existing cuts.

“We … think OPEC could announce an extension to supply cuts to cover the whole of 2020 rather than the three to six months the market is currently factoring in,” BNP Paribas Markets said in a note.

An extension “with an option to review policy at the next meeting, would send a strong message of commitment by signatories of the Declaration of Cooperation,” the BNP Paribas analysts said.

OPEC members meet on Thursday and then on Friday the OPEC+ group meets.

OPEC+ has been curbing supply since 2017 and is expected to keep the cuts in place to balance out record production in the United States.

Crude oil inventories in the U.S. fell by more than expected last week, according to the industry group American Petroleum Institute (API). Stockpiles of crude oil fell by 3.7 million barrels, more than double expectations of a decline of 1.7 million barrels.

Gasoline and distillate stocks increased, however, and the market will be looking for confirmation of the crude draw when official figures come out from the U.S. Department of Energy’s Energy Information Administration later on Wednesday.

Keeping a lid on prices are the dwindling prospects of a trade deal between the United States and China. The trade dispute between the world’s two biggest economies has weakened the global economy and held back oil demand growth.

U.S. President Donald Trump said on Tuesday an agreement to end the trade dispute may have to be delayed until after the American presidential election in November 2020.

“Both contracts should remain supported at these levels despite the (U.S.-China) trade concerns as the market looks to the start of the OPEC+ meeting tomorrow,” said Jeffrey Halley, senior market analyst at OANDA.

Russia Opens Siberian pipeline to China

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Russia opens Siberian pipeline to China as Beijing expands its influence in the Arctic

KEY POINTS
  • The pipeline comes after China unveiled a plan nearly two years ago called the “Polar Silk Road,” expanding its campaign for influence to the Arctic.
  • The resource-rich region is at the heart of the geopolitical battle and struggle for influence.
  • As Moscow’s relationship with Western countries becomes more frail, Russian business leaders look for more economic opportunities with China, especially in energy.
GP: Xi Jinping Vladimir Putin Power of Siberia pipeline
A screen shows Chinese President Xi Jinping as Russian President Vladimir Putin takes part in a ceremony inaugurating the “Power of Siberia” pipeline via a video link in Sochi on December 2, 2019.
Mikhail Klimentyev| AFP | Getty Images

A new natural gas pipeline connecting Russia and China is the latest example of increasing collaboration between Moscow and Beijing in the Arctic Circle.

The pipeline comes after China unveiled a plan nearly two years ago called the “Polar Silk Road,” expanding its campaign for influence to the Arctic. While Beijing has branded itself as a “near-Arctic state,” that far-stretched claim on the region is dependent on its partnership with Russia.

In a $400 billion deal signed in 2014, the 3,000 km long “Power of Siberia” pipeline stretches from Russia’s Siberian fields to China’s historically coal-burning northeast.

″(The pipeline) diversifies import supplies for China. It will be very competitive gas at the border and I think gradually improves gas penetration for the northeast part of China,” said Scott Darling, head of Asia Pacific commodities research at J.P. Morgan.

That region is an attractive market for Russia, as it “has low affordability for high-priced gas” compared with regions farther south which already have “well-established gas markets” with a diverse supply mix, IHS Markit said in a Monday report.

“New exports to this rapidly growing gas market is a growth strategy for the company,” but the European market will still remain a “top priority,” IHS said.

Reuters reported that Russia’s Gazprom expects the LNG pipeline to initially supply 4.6 billion cubic meters (bcm) of gas in 2020 before ramping up to its full capacity of 38 bcm by 2025.

Siberia pipeline
Map of the Power of Siberia gas pipeline through China.
Reuters | China National Bureau of Statistics

Source: Reuters

Darling told CNBC’s “Squawk Box” on Monday that one of China’s goals is to find cheaper, cleaner and greener alternatives to meet its high energy demand.

“I actually think what the (Chinese) government is doing at the moment is actually quite logical. We talk about Power (of) Siberian One, if they can actually negotiate reasonable pricing terms, you can actually have Power (of) Siberian Two, maybe longer term,” he added.

Business along the ‘Polar Silk Road’

In return for access to the rich resources of the Arctic, China is offering Russia capital said Zhixing Zhang, senior East Asia analyst at geopolitical intelligence platform Stratfor.

“So far, such cooperation primarily focuses on energy development. Whereas Moscow is satiating China with the access to resources, Beijing offers Moscow the capitals it needed for Arctic development,” said Zhang.

As Beijing pushes its “Polar Silk Road” agenda, Zhang noted that Chinese investors have been buying up stakes in projects and companies operating in the region.

That capital comes as U.S. and EU sanctions have limited Russia’s access to foreign funds. As Moscow’s relationship with Western countries becomes more frail, Russian business leaders look for more economic opportunities with China, especially in energy.

VIDEO02:05
A look the Power of Siberia pipeline project

Strafor’s Zhang said Russia’s hope to significantly ramp up transport and port development across the Arctic region “could pave the way for more expanded cooperation.”

As China pursues its Belt and Road Initiative, especially in Central Asian countries, Russia’s transportation expansion in the region could add “another arena of competition between the two powers,” Zhang told CNBC.

Geopolitical battle

The Arctic which neighbors the U.S., Canada, Denmark, Finland, Iceland, Norway, Sweden and Russia has been at the heart of a geopolitical and resource battle. China’s “near-Arctic state” ambitions have sparked some fury from stakeholders.

At the Arctic Council Ministerial meeting in May, U.S. Secretary of State Mike Pompeo questioned China’s claim of being a “near-Arctic state,” stating Washington’s unhappiness with Beijing’s position. The U.S. later refused to agree to climate change demands decided by the Arctic Council, which ultimately failed to issue a common final declaration.

All of which show “an increased assertiveness on the part of the United States, who had previously often been described as possibly the least involved of all Arctic states in Arctic affairs,” said Stephanie Pezard senior political scientist at the nonprofit global policy think tank RAND Corporation.

The Arctic is “easily accessible to all of its neighbours, but none is in a position to control it,” said Jeremi Suri, professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin in 2016.

“That is what makes the Arctic a source of strategic rivalry,” he said. “The Arctic provides access to lucrative resources under its waters — especially oil and gas … one of the world’s most coveted regions,” Suri added.

VIDEO01:31
Russian minister on transporting resources from the Arctic

Some countries are already active in many parts of the Arctic, extracting oil, gas and minerals. But deposits in some contested areas “will not be exploitable for probably decades” as nations rely on the UN to examine their claims, said Pezard.

“Russia is keen on maintaining control over the Northern Sea Route, due to its proximity to some important military and economic infrastructure of Russia’s, and the source of revenue it represents,” she said. But it’s not that easy for Russian ships to navigate the route in large numbers due to the hazard of drifting ice, high insurance costs, and other obstacles.

And beyond the fight over rich minerals, there is a growing concern from the U.S. side over China and Russia’s potential “militarization” of the Arctic, said Strafor’s Zhang.

“The narrative is driven by the revival of Great Power competition, a recognition of U.S. degraded capabilities and increased international activity and changing climate,” Zhang said.

Adding that “despite the noise, real U.S. efforts to counter both China and Russia in the Arctic remains thin. But such dynamics will continue to manifest alongside the shift of power balance among the great powers,” said Zhang.

Oil rises over 1% on hopes for deeper OPEC cuts, Chinese factory growth

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Reuters
KEY POINTS
  • Brent crude futures rose 76 cents, or 1.3%, to $61.25 a barrel by 0415 GMT.
  • West Texas Intermediate (WTI) futures rose 91 cents, or 1.7%, to $56.08 a barrel, having risen by more than $1 earlier.
GP: US Oil workers Oil Boom in Texas's Permian Basin 191014
Workers extracting oil from oil wells in the Permian Basin in Midland, Texas on May 1, 2018.
Benjamin Lowy | Getty Images

Oil prices rose more than 1% on Monday as signs of rising manufacturing activity in China pointed to increasing fuel demand, and hints that OPEC may deepen output cuts at its meeting this week indicated supply may tighten next year.

Brent crude futures rose 76 cents, or 1.3%, to $61.25 a barrel by 0415 GMT. West Texas Intermediate (WTI) futures rose 91 cents, or 1.7%, to $56.08 a barrel, having risen by more than $1 earlier.

On Friday, WTI futures settled 5.1% lower while Brent plunged 4.4% on concerns that talks to end the trade war between the United States and China, the world’s two biggest oil users, would be disrupted by U.S. support for protesters in Hong Kong.

But oil rose on Monday after factory activity in November in China, the world’s biggest oil importer, increased for the first time in seven months because of rising domestic demand amid government stimulus measures.

“At the open, prices remain supported by the surprising resilient China factory activity with the forward-looking PMI’s beating expectations,” said Stephen Innes, chief Asia market strategist at AxiTrader.

Prices were also supported after Iraq’s oil minister said on Sunday that OPEC and allied producers will consider deepening their existing oil output cuts by about 400,000 barrels per day (bpd) to 1.6 million bpd.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, known as OPEC+, are expected to at least extend existing output cuts to June 2020 when they meet this week.

The OPEC+ group has coordinated output for three years to balance the market and support prices. Their current deal to cut supply by 1.2 million bpd that started from January expires at the end of March 2020.

OPEC’s ministers will meet in Vienna on Dec. 5 and the wider OPEC+ group will meet on Dec. 6.

Ministers will either take no action, extend the cuts without change, or deepen them, ING Economics said in a note.

“We believe that only the final scenario would be constructive for oil prices,” ING said.

OPEC oil output fell in November as Angolan production slipped due to maintenance and Saudi Arabia kept a lid on supply to support prices before the initial public offering of state-owned Saudi Aramco, a Reuters survey found.

On average, OPEC pumped 29.57 million bpd last month, according to the survey, down 110,000 bpd from October’s revised figure.

But U.S. production keeps rising, filling the gaps left by OPEC, with output in September increasing to a new record of 12.46 million barrels per day (bpd), the U.S. government said in a monthly report on Friday.