Crude Prices have jumped nearly 2.5% with September Brent trading at $ 66.30 at the time of writing. This jump has come on the back of two events over the weekend namely, the agreement of US and China to resume talks and the agreement of OPEC + to extend production cuts. We shall take a look at both events in a little more detail and examine their impact on global prices
US – China trade talks
In their Tokyo meeting on Saturday, Presidents Donald .Trump and Xi Jinping agreed to resume trade talks. However, Trump has made it very clear that he is not about to sign any deal unless it is one that he believes.
The implication of this statement has to be seen that Trump is not about to back down from his stance that China should come to the table prepared to agree to what the US believed it had agreed to before it backed off. And it does seem unlikely that China will come there. Given these two stances, arriving at a consensus which will result in a deal is likely to take a long time.
In the interim, the existing tariffs are not going to be turned around. Therefore, the strain of these tariffs on the global economy will continue face the strains it is already facing.
China Daily, an English-language daily China often uses to relay messagesOpens a New Window., said in an opinion piece that although a U.S.-China trade deal is now more likely to happen, there’s still a long road ahead before both sides come to a 100 percent agreement. “Agreement on 90 percent of the issues has proved not to be enough, and with the remaining 10 percent where their fundamental differences reside, it is not going to be easy to reach a 100-percent consensus, since at this point, they remain widely apart even on the conceptual level,” it continued.
China tends to see this behavior of Trump as an attempt to ‘humiliate’ it, a situation they would not like to allow to come to pass no matter what the cost. Nor can Trump, who has shown himself to think very little of political niceties, afford to be seen to be backing down from the belligerent stance that he has taken. The cost of their respective positions is likely to be that both economies and, eventually, global growth will continue to suffer for longer.
President Putin and Saudi Crown Prince Mohammed Bin Salam agreed in principle to extend the present oil cut by another 6-9 months paving the way for a smooth discussion in the OPEC+ summit today and tomorrow. Significantly though, they agree that there is no need to deepen the existing cuts. As of date, the OPEC+ production is below agreed levels leaving room for growth. US production, which seems to have stalled for the past two-three weeks is likely to keep growing over time. It is yet to be established that last week’s record low ‘net import’ data (2.89 mb/d) from the US is a one off aberration or an indication of things to come. If that is not the case, there appears to be very little sign of shortage of supply.
In our opinion, the jump in prices today is of the nature of ‘double counting’ if you take into account price action over the last week. We do not believe that these levels of prices are sustainabl without damaging global growth..