Crude oil outlook bullish, but slowing economy may cap upside

Crude oil prices ended at the highest level last week since September 24 on account on bullish sentiment on easing of US-China trade war tensions and the surprise draw in US inventories and hope that the Opec and its allies would extend their production cuts in an effort to stabilise prices.

Traders also increased bets on Opec and its allies extending supply curbs when they next meet in December in a bid to counter the weaker growth in demand outlook in 2020. Money managers boosted their net-long positions on WTI for the first time since mid-September.

Notably, Goldman Sachs has lowered its demand for crude in 2019 and 2020. The forecast for 2019 was lowered to 950,000 barrels per day, down from an earlier forecast of 1.25 million. The forecast for 2020 has been lowered to 1.25 million, down from 1.45 million.

Meanwhile, disruptions to output in North Sea earlier this week also contributed to oil’s trading tone, Patterson noted. Workers from a North Sea oil platform were evacuated this week as a precaution following a structural inspection.

US-China trade war
Markets cheered trade war talks after trade negotiators from the two countries agreed to properly resolve their core concerns and confirmed that the technical consultations of some of the text agreement were basically completed confirmed by China.

Market still remains a bit cautious as although there are some signs of easing tensions, US Commerce Secretary Wilbur Ross reported that an initial trade deal doesn't need to be finalised next month, emphasising the need to get the right deal. That raises the risk of further prolonged negotiations and feed market anxiety about the prospects for a durable deal.

Inventories
Although WTI crude struggled to continue to push higher and stayed in a consolidation phase, the EIA's crude oil stock report triggered a fresh buying wave. The market was surprised by the data from EIA, which showed that US commercial crude oil inventories decreased by 1.70 Mbpd compared with expectations for an increase of 2.23 Mbpd as it ended a run of above average builds brought on by deep refinery maintenance.

The net imports fell substantially by 873,000 bpd. Low crude imports of 5.8 Mbpd were compounded by higher crude exports of 3.7 Mbpd, swinging US inventories to a draw at a time when they should build. Separately, supplies of oil from the US SPR, fell by 1 million barrels for the week. Petroleum products gasoline and distillate also saw declines in stockpiles.

The sharp fall of US active oil rigs offset fears on weaker demand. US energy companies reduced the number of oil rigs operating this week, leading to a record 11-month decline as producers follow through on plans to cut spending on new drilling. Drillers cut 17 oil rigs in the week to October 25, bringing the total count down to 696, the lowest since April 2017. That was the biggest weekly decline since April. Even though the number of rigs drilling new wells has declined since December, oil output has continued to increase in part because productivity of those remaining rigs - the amount of oil new wells produce per rig - has increased to record levels in most US shale basins. The US EIA projected US crude output will rise to 12.3 Mbpd in 2019 from a record 11.0 Mbpd in 2018.

Outlook
Prices can remain positive in the coming weeks on account of expectations for Federal Reserve to cut rates and easing trade war tensions may continue to underpin a bullish tone on oil prices. The market will watch closely over the development of US-China trade talks. But there still remains a lot of skepticism, and it will probably take some major news to shake the market out of its current mood and trigger a sustained rally. The slowing global economy continued to be a major headwind for crude oil.

(Investors are advised to consult financial advisers before taking an investment calls based on these observations)