Crude Oil Surges Nearly 3% on Trade War Truce: Is it Enough for Bulls to Press Higher?
Crude oil futures (/CLM5) rose nearly 3% yesterday as traders cheered progress on the US-China trade war, following optimism-fueled rallies in the US equity market.
Oil prices sank at the beginning of April as the expected effects of tariffs hit demand forecasts for crude oil. Prices fell from about $70 per barrel to as low as $55 per barrel.
But Washington and Beijing have agreeded to pause tariffs for 90 days as negotiators go back and forth. The US tariff rate will drop to 30% from 145%, and Chinese tariffs on US goods will drop to 10% from 125%.
The ceasefire eased fears that the oil market would quickly move into an oversupplied condition, especially amid increasing supply from the Organization of Petroleum Exporting Countries and its allies, known as OPEC+.
It’s planning to increase output by over 400,000 barrels per day (bpd) in June. That increase would follow a 130,000 bpd rise from April and a 411,000 bpd increase in May. Some speculate OPEC is attempting to cause some pain for US producers, and others see it as the group placating President Trump who has a friendly relationship with Saudi Arabia. Trump has made lower energy prices a priority.
Whether driven by diplomacy or an itch to punish US producers, the results are the same for crude oil prices. More supply on the global market means lower prices. The question now is how will this additional supply will affect prices if the economic outlook continues to improve. This is likely to depend upon how trade war talks pan out over the next few months.
That said, the oil market remains fragile. We are potentially just one Truth away from seeing prices quickly rise or fall. Regardless, the additional supply from OPEC creates an artificial top on oil prices because higher prices could incentivize OPEC to release more spare capacity. Moreover, fear of recession may have faded for now, but there remains a chance that growth will slow enough from knock-on effects from the tariffs, especially if a deal isn’t reached within the 90-day window. Are traders confident enough to push oil prices higher on a contingency?
Crude oil prices have retracted a little more than 50% of the move from its early April swing high at 71.76 to the swing low in April at 54.67. A break above the 9- and 21-day exponential moving averages (EMAs) was accomplished over the last four trading day as prices rallied 10%.
The immediate technical challenges for bulls to overcome is the 50-day simple moving average (SMA), which sits at 63.98, and the March swing low at 64.49. A break above 65 would likely bolster the bullish technical position for crude oil prices, but these levels also may present an opportunity for traders to take some profits.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. #@fxwestwater
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