Oil prices are hovering near highs of last three months, though the prices skidded for the third straight day after a decent rally it registered between December 11 to December 19, 2019. Brent oil had recorded a three-month high of $66.78/bbl, and Crude WTI registered three months high of $61.47/bbl as on December 19, 2019. This was primarily supported by the report that the US and China have announced that very soon, they are going to fix a phase-1 trade deal among themselves.
But the rally did not last very long, as at the time of writing on December 23, 2019, at 10:33 AM GMT, oil prices traded lower for the third straight day. International oil benchmark Brent Crude traded 0.16 cents or 0.24% lower at $66.02/bbl and American oil benchmark Crude WTI traded 0.17 cents or 0.26% lower at $60.28/bbl, respectively.
After hitting three months high recently, at the current trading level, Brent Oil traded 1.13% off that three-month high, and Crude WTI traded approximately 2.0% off its December 19, 2019 high.
The contentious trade war, which has jolted global economic powers, the US and China for nearly around one and half years, has seen the United States and China levying import tariffs on one another's exports of hundreds of billions of dollars. The escalated trade war has cost global economy, demand slowdown across the globe, energy prices nosedived, investors rushed to get bond exposure, as weakening earnings of companies dragged down their stocks prices many a time in the last eighteen months, and a recession like situation came into the picture.
The United States’ President Donald Trump has long accused Beijing of following unfair trade practices and intellectual property theft, on the other side China created a global perception that President Donald Trump is trying to stop China from becoming a global economic power.
Oil is among the beaten-down commodities in 2019, driven by oil demand slowdown in some of the large oil-dependent economies. Despite lower production from OPEC and allies (OPEC+) and drone attack launched on two large oil facilities of Saudi Arabia too was not able to sustain oil prices, which has been disrupting oil-based economies.
However, the emerging footprint of Electric Vehicles (EVs), has also contributed in the oil demand slowdown, although EV's contribution in the slowdown is nominal and as it is yet to roll out across the globe.
A so-called phase-1 trade deal announced in December
Recently a phase-1 trade deal has been announced by both US and China, which has sent some signals of relief from more than a year-long tit-for-tat trade rift, this move has also abated a fear of recession in near-term and benefited oil prices in the international oil markets. Both Brent and Crude WTI have recently touched a three-month high level, driven by optimism over demand recovery in near-term.
Also, equity as an asset class recorded decent rally across the world, and many developed and emerging market indices have also registered life-time highs, which reflects that investors are betting on equities for 2020.
Bond yields have also sent some classic signals of recovery in global growth, as yields expanded across the world after months of contractions, which indicates investors’ sentiment is again building towards the speculative asset classes.
Oil prices witness large volatility in 2019
Amid escalated trade tension, oil prices recorded large swings in a year-over time. International oil benchmark Brent Oil registered a 52-week high of $75.6/bbl and a 52-week low of $49.93/bbl, the volatility of around $25.6/bbl and the American oil benchmark Crude West Texas Intermediate (WTI) registered a 52-week high of $66.6/bbl and a low of $42.36/bbl, respectively. Which reflects oil prices experienced large ups and downs in a year-over period.
However, the majority of this volatility came from the contentious trade spat between the US and China, which in the past had heightened a recession like situation and which could lead to lower oil demand across the world.
But oil prices recorded some recovery in the past couple of days since the US and China decided to fix a phase-1 trade deal very soon.
At the current traded level, Brent oil traded 12.6% lower from its 52-week peak level and around 32.0% higher than its 52-week low level.
However, the so-called phase-1 deal between US and China decided in December 2019, reduced risks of several other United States tariffs on the Chinese goods imports, in exchange for more Chinese purchases for American goods and protection of US intellectual property.
Although, the deal is yet to be signed between the world’s two large economies and tariffs imposition of 25% on 250bn worth of Chinese exports still remain in place.
However, the United States would drop tariffs to 7.5% on $120bn worth of Chinese products.
Oil – Technical Wrap
Despite price contraction over the past three consecutive days, still, at the current trading level, International oil benchmark Brent Oil traded above its crucial long-term as well as short-term moving averages of 200-day and 50day, it also traded above its 10-day, 20-day and 30-day SMAs, which are considered to be immediate support levels.
A price-above 200-days of SMA is typically perceived as a favourable long-term trend. Also, the Moving Average Convergence Divergence is rising, with the gap between 12-day and 26-day EMA remaining in green, a positive technical measure.
Also, on the daily price chart, Bollinger Band® is narrowing and oil prices are moving closer to the upper Bollinger Band®, again a favourable technical measure.
The phase-1 deal signing between US and China is definitely going to provide support to the oil prices in near-term; also prices would be more sustainable, as it would bring energy demand back on fore which is long due and also the recent production output reduction by OPEC members and its allies would provide strength to the oil prices. However, the future trade relationship between the US and China would remain a crucial overall determining factor for oil prices in 2020.
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