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Crude Oil Outlook: Brent Eyes Brazil Auction Amid Trade War Talks

Crude Oil Outlook: Brent Eyes Brazil Auction Amid Trade War Talks

2019-11-06 04:00:00
Dimitri Zabelin, Analyst
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Crude Oil Price Forecast, OPEC Report, Trade Wars – TALKING POINTS

  • Crude oil prices may rise if Brazil auction attracts wave of capital inflow
  • OPEC lowered demand forecasts but crude oil still ended the day higher
  • US-China trade war optimism has been buoying crude – but will it last?

Learn how to use political-risk analysis in your trading strategy!

OPEC Report: World Oil Outlook

Crude oil prices closed a little over 1.30 percent higher at the end of Tuesday’s trading session despite the Organization of Petroleum Exporting Countries (OPEC) revising down its outlook for future demand. The energy cartel cited “signs of stress” in the global economy and anticipates members will have to deepen cuts to production in order to keep prices at profitable levels.

OPEC Secretary General Mohammad Barkindo said that the “continuous surge…of non-OPEC supply, led by tight oil from the United States, and to some lesser degree, Canada, Brazil, Norway, Kazakhstan and other non-OPEC countries” has contributed to the supply glut. He added that crude oil prices could stage a recovery in 2020, though this may be somewhat dependent on OPEC agreeing to deeper cuts at its meeting in December.

US-China Trade War: Impact on Crude Oil Prices

Since January, OPEC+ has agreed to cut output by 1.2 million barrels per day with the accord extending through March of 2020. The biggest factor that may mute the upside force of these supply cuts is the ongoing trade war negotiations between the US and China. The biggest fundamental headwind to global growth has been the US-Sino economic conflict which has weakened the demand for vital inputs like crude oil.

Chart showing crude oil prices

Therefore, crude oil prices are in large part at the mercy of the erratic nature of trade talks between Beijing and Washington. However, recent progress on that front has helped uplift market mood and led a selloff in the haven-linked US Dollar and a surge in sentiment-linked assets like crude oil and emerging market FX. The revival of market buoyancy may be offering OPEC members an ethereal moment of hope – but will it last?

Chart showing emerging markets

To quote US Secretary of Commerce Wilbur Ross, there could be a “slip up” in negotiations. The WTO has recently awarded China the right to slap over $3 billion worth of tariffs against the US from a dispute dating back to Obama’s tenure. Furthermore, officials still have to resolve key structural issues relating to intellectual property rights and Washington’s request for Beijing to reform its state-owned enterprises.

Brazil Auction: How Will it Impact Crude Oil Prices?

Latin America’s largest economy is about to hold one of the most expensive oil auctions in history. Firms are expecting to pay as much as $26.5 billion for the right to access deep-sea fields that may contain up to 15 billion barrels of crude oil according to the National Petroleum Agency. The crude deposits are lodged under thick layers of salt and are nearly twice the size of Norway’s reserves.

Some of the firms that will participate in the auction include Brazilian state-owned Petrobras, ExxonMobil and Chevron. Other major players have rescinded their bids because of the price tag on the deposits. However, the premium on these drilling rights comes in large part from the removal of “exploratory risk” through studies conducted by Petrobras that have confirmed that these reserves hold ample deposits of crude oil.

Depending on how enthusiastic firms are to bid for these rights – as expressed by how much capital the auction is able to generate – it could be read as a bullish outlook for crude oil. As a result, it could indirectly lead to capital flowing into petroleum-linked FX like the Canadian Dollar, Russian Ruble and Norwegian Krone. Recent market-wide optimism about US-China trade talks may amplify interest in Brazil’s oil-rich deposits.

If you’re interested in learning more about Brazilian markets, be sure to follow me on Twitter @ZabelinDimitri!

CRUDE OIL TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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