Thursday, December 5, 2019

Stocks rebound after hopes for US-China trade deal before 2020 rise; do oil prices have room to rise?

Tags
  • China
  • Dollar
  • Gold
  • Stocks
  • Oil
  • IPO

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Market recap: Aramco set to announce its final pricing for IPO shares today

Revived optimism for a trade deal between the US and China helped US equities rebound from three straight days of losses. Bloomberg reported on Wednesday that people familiar with trade talks said that the US and China are closer to agreeing on the number of tariffs that would be rolled back in a phase one deal and that US President Donald Trump's comments downplaying the urgency of a trade deal should not be taken as a signal that trade talks are not progressing. Trump later supported the report by saying that discussions with China were going very well. The DJIA gained 0.53%, the S&P500 rose 0.63% and the Nasdaq advanced 0.54%.

Private sector payrolls in the US only grew by 67,000 in November, declining from October's 125,000 figure. November's private sector payrolls grew the lowest in the past six months and fell much lower than economists' forecasts of 135,000. Institute for Supply Management's (ISM) non-manufacturing Purchasing Managers' Index (PMI) fell more than expected to 53.9 instead of 54.5, although details of the report suggested that the US services sector maybe stronger than the index suggests thanks to improvements in new orders and employment within the sector. The Dollar Index fell 0.09% as a result.

Gold fell 0.20% and the yen weakened 0.21% against the greenback as investors shift out of safe haven assets once again thanks to the trade war tug-of-war. US Treasury yields gained across the board, with benchmark 10-year yields rising 6bps to 1.77%.

Meanwhile in Asia, major indices started Thursday's trading session higher, tracking US gains. The Nikkei, Hang Seng Index and the Straits Times Index started the day 0.68%, 0.91% and 0.35% higher on Thursday.

The Canadian dollar surged on Wednesday night as the Bank of Canada (BoC) monetary policy statement for December was less dovish compared to October's statement, after deciding to keep rates unchanged at its monetary policy meeting on Wednesday. USD/CAD tumbled down by 0.71% as the Canadian dollar spiked up after the decision.

Saudi Aramco’s final pricing for its shares for its Initial Public Offering (IPO) is set to be announced today. The oil giant will also be announcing its final allocation for retail and institutional buyers today. If Aramco sets its IPO pricing at the top end of its pre-set range at 32 riyals a share, then the deal would raise US$25.6bn, overtaking Alibaba’s $25bn share sale in 2014 as the largest IPO of all time.

Today’s Analysis: Oil futures gains ahead of OPEC meeting

Oil prices will likely be affected by today's Organisation of Petroleum Exporting Countries (OPEC) and tomorrow's OPEC+ (OPEC and its allies including Russia) meeting in Vienna. During the meeting, OPEC and OPEC+ members will be reviewing the current production agreement and also the possibility of more cuts to production numbers. The current deal stipulates supply cuts of 1.2mn barrels a day, which expires at the end of March 2020. Brent crude futures rose 3.58% to $63.00 a barrel on Wednesday, as OPEC member countries and allies signalled that there may be a possible extension or further cuts to oil production and as optimism for a trade deal between US and China rose.

Reuters reported that Saudi Arabia may be looking to cut production further to support the IPO of 1.5% shares of the state-owned oil giant Saudi Aramco. But rising US shale oil production (a substitute for crude oil) is likely to be an obstacle that OPEC members have to take into consideration. If crude oil prices rise too much, demand may possibly shift to US shale oil, which may potentially put downward pressure on crude oil prices as well. In addition, mixed signals from OPEC+ members may be hinting at a higher probability for an extension to the current deal instead of deepening production cuts. Russian Energy Minister Valentinovich Novak signalled that Russia is more likely to support an extension rather than a cut to production, as it would be better to postpone any decisions on production numbers until April 2020, as the global economic outlook may change in the coming months. Iraq, OPEC's second largest producer after Saudi Arabia, signalled that it would support deeper cuts, despite historically over-producing.

But the US-China trade war has also negatively impacted the prices of crude oil. If the US and China are unable to come to a consensus for a partial trade deal, then the US is likely to apply the planned tariffs on December 15th on Chinese imports. This will likely lead to an escalation in the trade dispute between the two superpowers which will weigh on global economies. The negative impact can already be seen in the US and China economy. Furthermore, as China shows signs of slowdown, global demand is likely to drop as well. The outlook of demand for oil in 2020 is then likely to be dampened as a result.

The most likely outcome for the OPEC meetings today and tomorrow is for the cartel to extend the existing deal for three-months to June 2020 with better compliance by members and signalling that more cuts are possible in future. A Bloomberg survey indicated that 94% of the 176 respondents agree that OPEC will extend cuts into 2020 and the majority of them expects production cuts to maintain at 1.2mn barrels/day. In this case, Brent crude futures will likely only slightly rise, towards $63.35’s level, or an upside potential of roughly 0.55%. The next likely outcome will be for a deeper cut by the cartel, which would likely send Brent oil futures rising towards $64.16.

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Technical Analysis:         

Brent Crude Oil

Oil bulls pushed past the resistance level of 62.00 and continued to charge forward as a result of signals from OPEC members for a likely extension to the existing production cut deal and on optimism for a US-China trade deal. The bulls will likely continue to put upward pressure on Brent and try to keep the Brent above the 20-day, 100-day and 200-day moving averages.  But today and tomorrow’s meeting will likely impact oil prices. Bears are likely to try to keep Brent below the 63.35 resistance level. But if the outcome of OPEC’s meeting favours the bulls, then expect the bulls to charge forward and break the 63.35 resistance level.

Support: 62.00 / 60.66 / 60.06

Resistance: 63.35 / 64.16

Brent Crude Oil Chart (H4)

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*Source: ADSS, TradingView