Oil markets have been following the broader market higher as risk appetite remains robust, finding support from the global economic recovery, which is outpacing expectations.
Oil prices traded with an optimistic tone on Monday after China released positive factory data, as life in China’s industrial heartland is moving towards pre-coronavirus levels.
Due to OPEC + production cut deal and unwavering compliance around the principle of compensation along with the dour outlook in the US shale complex, markets continued to rebalance at a much quicker pace.
Traders now train focus on this week’s US crude inventory data to confirm this view as we edged towards the end of the driving season, which may see the decline in inventory slow.
Despite the bullish macro sentiment, markets continue to be corrected by concerns about the slow demand recovery in distillates, products, and the flatline in gasoline demand.
The narrative is still very much focused on the resurgence of coronavirus infections, being the main uncertainty around demand.
However, the prospects for additional US stimulus are keeping demand hopes afloat. While at the same time, the “the cliff edge ” premium has significantly been reduced as US fiscal negotiations are much less critical to the market’s view after President Trump signed executive orders over the weekend, including unemployment benefits.
Now it is a matter of whether Democrats can squeeze more juice from the deal, which seems likely after Treasury Secretary Steven Mnuchin said there are areas for compromise.
But predictably, we are dealing with more Congressional theatrics as Trump’s executive order to extend coronavirus economic relief has faced some ” constitutional “opposition from Democrats, which might distract the market’s attention away from this week’s big elephant in the room which is the US-China trade talks.
The tension between the US and China remains a significant risk for oil markets as any wobble in China’s commitment to reaffirm their trade deal with the US impacts the global economy and its recovery from the economic beat down effect of the virus pandemic.
With the US election more in focus than ever, most of the market’s worst-case scenario leaves US President Donald Trump out of the equation.
The President is growing desperate in the face of rising infections and falling poll numbers. And if he thinks it will boost his polling numbers look for him to lash out at China more aggressively by rolling the Phase 1 trade deal back and even heaping on additional tariffs.
Indeed, the worst-case scenario when factoring President Trump into the equation would be grim for the global economic recovery and oil markets.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp