US crude jumps 2.6%, settling at $49.78, on trade talks and OPEC cuts

Key Points
  • Oil prices rise, supported by hopes that talks in Beijing between U.S. and Chinese officials might defuse a trade dispute.
  • U.S. commerce secretary says China trade deal is possible, but concerns about Sino-American relationship linger.
  • OPEC-led crude supply cuts support oil prices, but U.S. crude output could already be above 12 million barrels per day, says JBC Energy.
Essam Al-Sudani | Reuters

Oil prices rose on Tuesday, supported by hopes that demand may rise more quickly if talks between U.S. and Chinese officials resolve the trade dispute between the world's two biggest economies.

A possibility that OPEC-led supply cuts could be extended also supported prices.

U.S. West Texas Intermediate (WTI) crude oil futures ended Tuesday's session up $1.26, or 2.6 percent, at $49.78 per barrel. International Brent crude futures gained $1.29, or 2.3 percent, to $58.62 per barrel by 2:26 p.m. ET.

"The trade situation is definitely bullish; you have a good demand construction if we can wrap up this trade deal," said Bob Yawger, director of futures at Mizuho in New York.

The talks are going well so far and will continue on Wednesday, U.S. delegation member Steven Winberg said.

Expect better performance across asset classes in Q1: Citi
Expect better performance across asset classes in Q1: Citi

These are the first face-to-face meetings between officials from the two countries since U.S. President Donald Trump and Chinese President Xi Jinping agreed in December to a 90-day truce in a trade war that has buffeted global financial markets.

On Monday, U.S. Commerce Secretary Wilbur Ross said there was a "very good chance" of reaching a settlement, while China's foreign ministry said Beijing had the "good faith" to resolve the dispute.

Some analysts warned, however, that the relationship between Washington and Beijing remained shaky and that tensions could soon flare anew.

"Surely, there will be more twists and turns in the saga and increasing U.S. tariffs on Chinese goods after March from 10 percent to 25 percent cannot be excluded," Tamas Varga of PVM Oil Associates said. "For now, however, optimism prevails."

There is also concern that a worldwide economic slowdown will dent fuel consumption, leading the hedge fund industry to cut significantly its bullish positions in crude futures.

Oil traders also worried that a possible worldwide economic slowdown could dent fuel consumption. The hedge fund industry has cut significantly its bullish positions in crude futures.

S&P Global Ratings said it had lowered its average oil price forecasts for 2019 by $10 per barrel to $55 for Brent and $50 per barrel for WTI.

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"Our lower oil price assumptions reflect slowing demand and rising supply globally," said S&P Global Ratings analyst Danny Huang.

Crude prices so far in 2019 have been buoyed by supply cuts from OPEC including top exporter Saudi Arabia, as well as non-member Russia.

Saudi-based Arab Petroleum Investments Corp, a firm specializing in funding petroleum projects, estimated in a report on Tuesday that oil prices are likely to trade at $60 to $70 per barrel by mid-2019.

Looming over the OPEC-led cuts is a surge in oil supply from the United States, now the world's top producer, driven by a steep rise in onshore shale drilling.

U.S. crude production rose 2 million barrels per day (bpd) last year to a world record 11.7 million bpd.

With drilling activity still high, most analysts expect U.S. oil production to rise further this year.