Forecast: oil will wait for reciprocal concessions from US in negotiations with China

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UNITED STATES (VOP TODAY NEWS) — Acting out encouraging statistics from OPEC +, oil prices are also puzzled by the prospects for trade negotiations between the United States and China, the completion of which may again be delayed. And here it would be nice for Washington to realize that reciprocal steps are required in response to partner concessions.

Ultimate certainty

Against the background of more distinct positive statistics from OPEC +, as we predicted, oil prices last week showed an upward trend, reaching $ 67 a barrel. On Monday, at 15:17 Moscow time, Brent crude futures were at $ 67.43 a barrel compared to $ 66.28 a week earlier.

At the same time, the March report of OPEC published last week reported that given the more significant cuts in production in Saudi Arabia, as well as those staying under US sanctions Venezuela and Iran, the cartel in February reduced oil production by 221 thousand barrels per day in February to 30.549 million barrels per day, exceeding its commitments by 6%, and on March 17 in Baku, where the meeting of the OPEC + Technical Monitoring Committee took place, the Minister of Energy, Industry and Mineral Resources of Saudi Arabia, Khalid Al-Falih According to the report, in February the member countries of the organization fulfilled their obligations to limit oil production by almost 90%. And in March, Al-Falih assured, “they are able to easily get into the performance of more than 100%.” In turn, the Minister of Energy of the Russian Federation Alexander Novak told, that the Russian side plans to reduce production by 140 thousand barrels per day relative to October 2018 in the current month. Recall that at the end of 2018 the parties agreed to reduce production for the first half of the year by 1.2 million barrels per day, of which 228 thousand, accounted for Russia. The situation with OPEC +, stated the head of the analytical department of the bank “Zenit” Vladimir Evstifeev, is already defined and extremely understandable. The parties to the agreement demonstrate high discipline in respecting production quotas, which supports quotes. The questions to OPEC + concern the timing of a decision on the prolongation of the transaction until the end of 2019. Therefore, the subsequent movement of oil will largely depend on the weekly statistics from the United States on production and reserves. If the trend to reduce stocks in the country is confirmed,

Until the end of March, Kirill Kononov, a senior analyst at the Center for Economic Forecasting at Gazprombank, determined that oil should continue to go up, gradually approaching the level of $ 70 per barrel. After that, non-market factors with a high probability will appear that can lead to a temporary price reduction to $ 65-67 per barrel, Kononov specified.

Short-term dynamics of oil prices, said Valery Weisberg, director of the analytical department at the Investment Company “Region”, is likely to be positive: indicators of technical analysis signal a continuation of growth. For medium-term dynamics, the April conclusion of OPEC + on quotas (which are likely to remain at the current level) will be key; coupled with Donald Trump’s decision on sanctions against Iranian oil (exceptions for eight countries expire in May, and, obviously, they are partially prolonged), as well as the continued decline in production in Venezuela in the coming months.

In recent months, said Kirill Kononov, the appreciation has been maintained, primarily due to the implementation of the OPEC + agreement and an increase in China’s oil purchases. These factors will continue to operate until mid-April. Given that in April the issue of US sanctions against oil exports from Iran should be resolved. The resolution of this issue will be taken into account at the subsequent meeting of OPEC. “The increase in oil production by OPEC + is possible if restrictions on exports from Iran are strengthened, and also if it is necessary to compensate for the fall in oil production in Venezuela. If the situation around Venezuela and Iran remains similar, the status quo may be maintained,” the expert said.

Judging by the level of world reserves and the downward trend, as well as the level of oil prices, additional restrictions on production within the framework of the OPEC + announcement are not yet required, Vladimir Evstifeev said. Accordingly, he added, investors have no formal reason to expect such a decision. However, quotes could be supported earlier than in June, the prolongation of the current agreement for the whole 2019.

Extreme uncertainty

According to the Energy Information Administration (EIA) of the US Department of Energy, for the week ending March 8, commercial oil reserves in the country decreased by 3.86 million barrels to 449.1 million. Analysts had expected an increase of 2.66 million barrels. Moreover, although for the week ended March 1, stocks in the United States, by contrast, increased by 7.1 million barrels to 452.9 million, one week earlier they also decreased by 8.6 million barrels to 445.9 million.

Oil production in the United States for the week to March 8 also decreased by 100 thousand barrels per day to 12 million barrels per day. Whereas in the previous week the production volume remained the same. But the number of drilling rigs in the United States is reduced for the fourth week in a row.

According to Baker Hughes, in the week to March 15, the number of oil rigs in the country decreased by 1 piece to 833 units (over the previous week it dropped by nine pieces to 834 units – to a minimum since May 2018). In such circumstances, of course, the reports of other agencies about the continued “steady growth of production” in the United States look strange.

As a rule, noted Valery Weisberg, statistics on stocks in the United States has a short-term impact on the markets. However, in the whole year, with OPEC + quotas unchanged, their systematic reduction is quite likely, which will support the market. Given that production in the United States reached the expected bar and in the context of infrastructure deficit will continue to stagnate for some time. This is a favorable, but already accomplished, fundamental fact, pointed out the director of the analytical department of the EC Region.

Extraction of shale oil has become large enough to fully load the pipeline system in the south, stressed Kirill Kononov. If everything goes according to plan, he determined that the indicated volumes will increase in the third and fourth quarters of 2019, but this will change little.

Whereas Vladimir Evstifeev noted that the decline in oil reserves in the United States in early March looks somewhat strange. Usually in the run-up to the automotive season, stocks show growth. Probably, such a dynamic was caused by the prohibition of the supply of Venezuelan oil and, in particular, by the 6-day blackout that interrupted its shipment. Formally, oil supplies from Venezuela to the United States are prohibited, which, however, does not prevent other countries, including the Russian Federation, from reselling this oil to the United States. “If the decline in stocks continues, it will support investors’ opinion that the OPEC + transaction is already working and allows leveling the factor of increase in supply from the American side,” the expert formulated.

Unlimited predestination

Meanwhile, the general uncertainty, in particular, related to the US sanctions against Venezuela and Iran (objectively contributing to the increase in black gold prices), is further aggravated by the vagueness of the prospects for trade negotiations between Washington and Beijing. And if earlier it was assumed that the American and Chinese leaders Donald Trump and Xi Jinping will meet and sign the final trade agreement before the end of this month, last week, Bloomberg, with reference to sources, reported that their meeting would take place more likely not earlier than April . And in this regard, the question inevitably arises, is it even possible in the near future to rely on the achievement of a final trade agreement between the USA and the PRC? Especially since it is absolutely not clear

Although, according to Valery Weisberg, geopolitical tensions tend to decrease: the United States and China are clearly approaching a deal that the White House owner Donald Trump does not want to disrupt. Whereas in the situation with North Korea, it is important that the parties are aimed at maintaining dialogue, although they have not demonstrated significant progress over the past year. At the same time, there are signs of deterioration in economic contacts between the United States and India, which is one of the major importers of Iranian oil and Russian weapons. In the context of the aggravation of its conflict with Pakistan, the complication of relations between India and the United States could become a new catalyst for volatility, warned the director of the analytical department of the IC “Region”.

Nevertheless, continued Vladimir Evstifeev, the nature and objectives of the US negotiations with the PRC, as well as with the DPRK, are different. With Beijing, Washington is trying to promote its own economic interests in foreign trade, seeking to equalize the trade deficit. And with the DPRK, foreign policy objectives are pursued in which a more significant role is assigned to the game element. At the same time, the speed of reaching a consensus with China will obviously largely be determined by internal political processes in the United States, which now absorb the main attention of the American authorities. And this factor has a negative impact on the markets, since the remaining nervous expectations do not allow us to estimate the medium-term outlook, although the introduction of additional duties from March 1 is delayed and under these conditions the fact of continuing negotiations looks more positive, of course, than their failure

Nevertheless, the question of mutual concessions today is quite relevant. For example, last Friday, the All-China People’s Assembly approved a law on foreign investment, which not only aims to increase the appropriate level of transparency and ensure equal conditions for local and foreign companies in the market, but also orders Chinese officials to keep the secrets of foreign entrepreneurs. Obviously, this law was also adopted in the light of the US requirements for the protection of intellectual property in the PRC. And now, in theory, some reciprocal reciprocal steps in the negotiations should be made by Washington.

As well, by the way, as well as to advance the dialogue with the DPRK, which has frozen its missile tests, it would be logical for the American side to undertake at least partial sanctions for the latter.

This article is written and prepared by our foreign editors writing for VOP from different countries around the world – edited and published by VOP staff in our newsroom.

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