The same factors that drove U.S. West Texas Intermediate and international-benchmark Brent crude oil futures higher last week will be at the forefront this week so traders should brace for heightened volatility and expanded trading ranges. The factors include the U.S. Dollar, U.S.-China trade relations, U.S. inventories and the escalating conflict between the U.S. and Iran.
Investors are pricing in a 100% chance of a Fed rate cut in late July, and others to follow in September and December. This is driving the U.S. Dollar sharply lower against a basket of major currencies. A weaker dollar tends to increase foreign demand for dollar-denominated gold, which is supportive for higher prices.
U.S.-China Trade Relations
Will they or won’t they meet? That is the question some crude oil traders are asking this week. The “they” refers to U.S. President Trump and China President Xi Jinping.
Last week, Trump said that teams from the two sides would begin preparations for the leaders to sit down at the G20 summit in Osaka, Japan. China, which previously declined to say whether the two leaders would meet, confirmed the get-together.
White House officials declined to go into detail about the preparations or expected outcomes of the talks in Japan, but both sides reiterated long-held positions: U.S. officials called for structural changes in the Chinese economy and in how Beijing treats U.S. businesses; China called for dialogue instead of expensive tariffs.
Positive developments from the talks should be bullish for crude oil because they could help turn around the global economy, leading to increased demand.
Last week, the U.S. Energy Information Administration (EIA) reported that U.S. crude supplies fell by 3.1 million barrels for the week-ended June 14. That followed two consecutive weeks of gains. Gasoline and distillate inventories also fell. This could be positive if the trend continues this week.
According to the American Petroleum Institute (API), the net build in inventories this year is 34.02 million barrels for the 25-week reporting period so far this year. Bullish traders would like to see this figure start to drop.
Last week, the key issues driving prices higher were Iran’s shooting down of a U.S. drone over international waters, and Trump’s last minute cancellation of an attack on Iran.
Over the weekend, President Trump said the United States would impose “major additional sanctions” against Iran on Monday, after calling off military strikes against the Islamic Republic over concerns about the loss of life.
The Trump administration also said over the weekend that the United States is prepared to negotiate with Iran without preconditions. Trump, when asked whether he had conditions for talking with Iran, said “not as far as I’m concerned, no preconditions,” though he reiterated that his administration expected Iran to discuss its nuclear program.
Trump’s position was reiterated by Secretary of State Mike Pompeo as he prepared to depart for the Middle East.
“We’re prepared to negotiate with no preconditions,” Pompeo told reporters Sunday. “I am confident that at the very moment they are ready to engage with us, we will be able to begin these conversations.”
Vice President Mike Pence added, “Iran needs to understand we’ll never allow them to obtain a nuclear weapon and we will not allow them to continue to show violence across this region.’
Gains could be limited if traders decide to take the U.S.-Iran military conflict premium off the table, at least temporarily. The G-20 meeting between Trump and Xi will probably take place over the week-end so this won’t be an issue during the week unless the meeting is cancelled.
If there is any inter-week volatility then it will likely be fueled by the API report late Tuesday and the EIA inventories report on Wednesday. Any reaction to the dollar is likely to be small.
This article was originally posted on FX Empire
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