Oil's Final Rally of 2019
The price of oil rallied this morning, topping $62 per barrel after a strong dip in the U.S. dollar and a larger-than-expected draw from inventories on Friday.
This put crude for February delivery at a three-month high. But we should probably hold off on the celebration planning for now.
The geopolitical tennis match between Washington and Beijing landed in favor of a trade deal last week. As a result, safe-haven demand for the U.S. dollar fell, putting the greenback now near a four-month low and boosting oil prices.
Meanwhile, the EIA reported on Friday that crude inventories fell by 5.47 million barrels (about 1.75 million barrels more than expected), adding more fuel to the rally.
Oil bulls are also looking forward to an OPEC+ production cut agreement of 1.7 million barrels per day slated for the first quarter of next year.
The OPEC+ production cut scheduled for next year is 500,000 barrels per day larger than 2019's production cut agreement.
The hope is that OPEC+'s cut — combined with a drop in oil production from Iran and Venezuela due to U.S. sanctions — will be enough to offset a supply glut in U.S. crude inventories, which are 1.9% above the seasonal average right now.
Bulls are also hoping record-high stock prices signal a positive economic outlook, bolstering optimism for energy demand.
Meanwhile, bears are hedging for the exact opposite reason, with many fearing a U.S. recession in 2020. Soaring stock prices are used as a signal of recession as much as (if not more than) a signal of continued growth.
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In the meantime, the tiff between U.S. and China trade does not appear to be moving in any direction that would lead to a complete resolution. And many are concerned trade tensions have only served to suppress economic growth and energy demand.
For every bullish oil argument, there is a bearish response. And despite the last 12 or so weeks of rising oil prices, there are scores of factors that could drive prices lower.
The only thing we can know with any real certainty is that oil prices will be affected by movements in the U.S. dollar and inventories. These are the two things oil investors should pay most attention to in 2020.
Last Word of the Year
Before I sign off for the last time of the year, I want to wish you a happy, successful, and profitable new year.
2019 was... well, it was a pain in the ass for everyone. Maybe 2020, won't be... maybe.
Thank you for being a subscriber. I'll see you on the other side.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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