The Oil market drifted lower on Tuesday during the Asian session, adding pessimism to Monday trade since the output growth in the US seems to know no boundaries.
WTI and Brent futures declined in the latest phase of Asian session but then receded to the opening level as the news background remains calm and traders stand pat ahead of EIA commercial reserves data. On Monday, both grades fell by more than 1 percent, as fears of uncontrolled production in the US outweighed optimism associated with OPEC cuts. These two fundamental factors remain the key drivers while the rest of market data, whether commercial reserves in the US or supply outages have only a transitory effect on the market. Improving forecasts for world consumption bring temporary relief to investors as the pace of US oil output can easily make up for new demand while competition between US producers returns the market to a phase of glut.
At the end of 2017, US production reached 10 million barrels per day and the price increase due to OPEC market concessions allowed producers to increase production, which is expected to reach 11 million barrels per day by the end of 2018. Shale oil accounts for biggest part of US production gain, which features the simple process of extraction, a small resource of wells and rapid wear of equipment.
“The expected increase in oil production in key fields will be 131K bpd, to a record level of 6.95 M bpd in March,” the EIA reported in a monthly report published on Monday. Immediately after the report, the number of sellers increased sharply on the market, pointing out that investors narrowed the calculations for the dynamics of supply and demand in the world market to mere US output data, while other factors affecting the balance remain less significant. In the previous report, EIA predicted an increase in production over the same period by 105K barrels, that is, 26K barrels less than in the updated forecast.
The European Union has promised that Trump’s attempts to repair trade barriers will have its retaliatory measures. Last week, Trump introduced duties on imported steel and aluminium, temporarily exempting Mexico and Canada from tariffs. For the EU and China, duties will not have a significant impact on GDP and will not become a sensitive blow to the industry, however, as the representative for external trade relations of the European Union noted, the lack of retaliatory measures can be regarded as a weakness. This convinces the US trade partners to be guided by preventive measures, that is, to give the US a sense of the morbidity of defensive measures of trade and the confrontation of globalization. The tariff policy of the European Union and the US can really cause indignation – the rate for cars imported from the EU to the US is 2.5%, much less than 10% of the US to the EU, but to import trucks from the EU to the United States is 25% more expensive than vice versa. The representative of foreign trade of the EU also noted that duties on footwear are 48%, 12% for textiles and 164% for peanuts.
On Saturday, Trump wrote in his tweet that the EU could be included in the “white list” of trade partners if it reduces the “horrific” import tariffs on goods from the US. The EU, in turn, reproached Trump for “cherry-picking”, while ignoring the overall picture of mutual trade. Also, the rules of compliance with a “fair” trading partner were not clearly worked out by the US government, the EU representative said, and represent a separate president’s attack on high tariffs taken in isolation from the general tariff policy.
Tweet Trump on Monday allowed investors to relax, in which he said that his assistant Wilbur Ross will negotiate with European counterparts to reduce trade barriers.
The dollar reacted weakly to the news and traded in a limited range, maintaining a consolidation regime near the level of 90. Demand for Treasury bonds increased, and profitability receded, as tensions in world trade remain the main source of concern, facilitating attempts to evade investors from risks. US stock indices closed in different directions reflecting the uncertainty associated with tariff wars.
In addition to working with the worst scenarios, the market should also consider the unlikely but positive scenario of confronting Senators with Trump’s decision. The famous Trump critic Jeff Flake, a senator from Arizona, submitted to the vote a bill to cancel Tramp’s tariffs, but getting 2/3 of the votes to veto the president’s decisions remains the subject of narrow speculation.
The Japanese yen has declined under pressure by speculation that Prime Minister Abe could participate in corrupt schemes. Small but the existing probability of layoff was promoted by bulls USDJPY as a bearish signal for the yen, however, it is obvious that the fundamental price of USDJPY is lower which bill the target with the elimination of factors for concern. Search for signals to buy the yen should be done in the range of 108.50 – 109.00. This level is likely to be active with the release of US inflation data for February. The report is likely to reflect a strong job growth (313K in February), while interest rate expectations are likely to shift to four increases.