Is this the be­gin­ning of the next Bull Run in oil?

Tehran Times - - ENERGY -

It will be a busy few days for the oil mar­ket, and the week started off with a bang. Oil prices shot up on Mon­day on news that the U.S. and China has de­layed the trade war, as well as on in­creas­ing odds of deal in Vi­enna.

A lot of news came out of Buenos Aires over the week­end at the G20 sum­mit. Pres­i­dent Trump met with Xi Jing­ping where they hashed out a deal on trade. Or, so it seems. The White House called it a “highly suc­cess­ful meet­ing,” and Trump was quick to de­clare vic­tory.

The meet­ing was widely hailed as a thaw in re­la­tions, with much of the press billing it as a “truce.” But the deal isn’t so much a deal as it is a de­lay in the trade war. The U.S. has de­cided to hold off on hik­ing tar­iffs on $200 bil­lion worth of Chi­nese im­ports from 10 to 25 per­cent, which had been sched­uled to take ef­fect in Jan­uary. China, in turn, promised to in­crease im­ports from the United States.

How­ever, China was care­ful enough not to get locked into specifics. By Mon­day, signs that there were some mis­un­der­stand­ings about what the two sides agreed to quickly be­came ap­par­ent. Trump boasted that tar­iffs on U.S. au­tos go­ing into China would fall from 40 per­cent to zero. China did not con­firm that, and by all ac­counts, that is a con­ces­sion too large for Bei­jing to coun­te­nance, at least at this stage.

More to the point, the same is­sues that have di­vided the U.S. and China on trade – in­tel­lec­tual prop­erty is­sues, China’s in­dus­trial pol­icy, and more – re­main. In fact, there has been very lit­tle progress on these over­ar­ch­ing is­sues. For Trump, the de­ci­sion to hold off on a trade es­ca­la­tion was borne out of po­lit­i­cal panic af­ter the an­nounced clo­sure of sev­eral GM fac­to­ries, grow­ing un­ease from farm coun­try, and sweep­ing losses in the mid-term elec­tions.

So, the pause but­ton al­lows the White House to buy some time on tar­iff hikes. But only 90 days. Many trade watch­ers find it hard to be­lieve that Wash­ing­ton and Bei­jing can set­tle long­stand­ing dif­fer­ences on trade in just three months, es­pe­cially since there has been no dis­cernible progress through­out 2018 amidst sev­eral rounds of tar­iffs, nor has there been progress over sev­eral years of on and off ne­go­ti­a­tions.

The Trump ad­min­is­tra­tion it­self is also di­vided in­ter­nally. The not-so-se­cret gulf be­tween free-traders like Sec­re­tary of Trea­sury Steven Mnuchin and Larry Kud­low on the one hand, and trade ad­viser Pe­ter Navarro and U.S. Trade Rep­re­sen­ta­tive Robert Lighthizer on the other, re­mains.

In fact, Trump has ap­pointed Lighthizer to be the point per­son to lead the talks with China over the next few months, which makes it un­likely that the U.S. and China will sim­ply back away from the cliff. He is very up­front about his hard­line trade be­liefs vis-à-vis China. There will need to ei­ther be a sweep­ing deal that re­sults in ma­jor changes in trade prac­tices, or the trade war will re­sume.

Nev­er­the­less, judg­ing by the re­ac­tion of global fi­nan­cial mar­kets, Wall Street des­per­ately wants to be­lieve that the trade “deal” reached over the week­end was for real. Stocks soared on the news.

To be sure, the de­lay of the tar­iff in­crease is im­por­tant, even if it is tem­po­rary. The sched­uled in­crease of tar­iffs from 10 to 25 per­cent on Chi­nese goods will lessen the eco­nomic dam­age from Trump’s trade war. It also in­creases the po­lit­i­cal cost of re­turn­ing to a bel­li­cose po­si­tion on trade. Trump and Xi both want to end the trade war, even if it’s hard to imag­ine what a res­o­lu­tion might look like.

Oil traders also wel­comed the news. Trade pro­tec­tions have slowed com­mod­ity de­mand, and have been a ma­jor head­wind to the global econ­omy, ac­cord­ing to the IMF. The agree­ment be­tween Trump and Xi, such as it is, is pos­i­tive for oil prices.

Mean­while, in what would nor­mally be the head­line news, Rus­sia and Saudi Ara­bia ap­par­ently reached a deal to cut oil pro­duc­tion at the up­com­ing OPEC+ meet­ing in Vi­enna. Rus­sian Pres­i­dent Vladimir Putin said that Rus­sia would go along with out­put curbs, although the spe­cific lev­els have not been agreed to. “We have an agree­ment to ex­tend our deal,” Putin said on Satur­day af­ter a meet­ing with Saudi Crown Prince Mo­hammed Bin Sal­man in Ar­gentina. “There is no fi­nal de­ci­sion on vol­umes, not yet.”

The com­ments sug­gest a deal is highly likely later this week. “While no vol­umes or cut were specif­i­cally men­tioned, we view this as the po­lit­i­cal agree­ment needed for the cuts to go through and re­it­er­ate our view that such a cut in pro­duc­tion will be agreed upon this week in Vi­enna,” Gold­man Sachs wrote in a note.

In short, the G20 meet­ing in Ar­gentina pro­vided a lift to oil mar­kets, even if some of the specifics still need to be hashed out.

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