Trade Talks Buoy Markets, but U.S. Production Growth Looms

The U.S. and China conclude their two-day trade talks in Beijing today with President Trump tweeting this morning “Talks with China are going very well!” This tweet and word that China had their top trade official, Liu He, attend the talks early this week have boosted equity and oil markets along with it as February WTI trades higher today to $49.42/barrel despite growing U.S. oil production.

Trade talks this week were initially supposed to include just junior officials, but the arrival of Liu He made markets believe that both parties are encouraged to come to an agreement sooner rather than later. Some of the oil price rally can be attributed to this, but much of it derives from the headlines that Saudi Arabia is planning to cut crude oil exports to the U.S. by about 800,000 barrels per day to 7.1 million barrels per day. This is a new strategy the Saudis are implementing because it would have a bullish effect on the widely tracked U.S. Department of Energy inventory reports. This strategy is aimed obviously at increasing the price of Brent as it is said that the Saudis need an average oil price of $95/barrel to reach their budget this year.

The main antagonist to this plot is the growing U.S. oil production. The latest report from the Department of Energy stated our current production stands at a world record of 11.7 million barrels per day. JBC Energy believes it will be “significantly above 12 million bpd” this month. On Sunday Goldman Sachs revised their 2019 WTI price outlook lower from $64.50/barrel to $55.50/barrel with a “persistent beat in 2018 shale production growth” which echoes the Saudi’s angst to boost prices as quickly as possible.

February RBOB trades higher by $0.0092 to $1.35/gallon and ULSD is up by $0.0247 to $1.8031/gallon.

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