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Oil Prices Jump But Don’t Expect It To Last

Oil Prices Jump But Don’t Expect It To Last
China Oil Production
Image by Plazak

In early trading on Monday, prices for global oil benchmark London-traded Brent crude and U.S. oil benchmark West Texas Intermediate (WTI) crude both increased more than $1 per barrel. 

The price jump came amid news that the OPEC+ group of oil producers, which includes production heavyweights Saudi Arabia and Russia, could agree to deepen their ongoing oil production cut agreement when the group meets this Friday, one day after a general OPEC meeting in Vienna. The current OPEC+ deal to cut oil supply by 1.2 million barrels per day (bpd) started in January but expires at the end of March 2020. 

Brent rose $1.20 to $61.69 per barrel by 0825 GMT on Monday, while WTI crude increased by $1.05 to $56.22

Prices also received upward support by reports that rising manufacturing activity in China suggested stronger demand.

Monday’s price increases come after a general pullback on Friday. WTI futures plunged more than 4% to end the session at $55.17 per barrel, resulting in a 4.1% loss for the week and breaking a three week winning streak. Brent fell by $1.44 on Friday to settle at $62.43 per barrel. For the month, oil prices were up 6%, making it the best month since April but still far from prices that major oil producing countries need to balance their books.

However, the increase in Chinese manufacturing activity is mostly due to Beijing’s accelerated stimulus measures, so it’s not pure market driven growth. In practical terms, this means that for the Chinese economy to return to a state of normality, there needs to be a cessation of trade tensions between Washington and Beijing.

An article on Sunday in the Beijing-based Global Times newspaper, which often reflects the views of the Chinese Communist Party (CCP), seems to agree. It stated that “when a significant economy like China’s faces an outlook of an evident slowdown, an economist’s common-sense response would be to ramp up the magnitude of fiscal stimulus, and simultaneously cut taxes and fees for the middle class so they will have more in their pockets to shop and activate domestic spending.” 

It added that to further stimulate the economy, the Ministry of Finance authorized that a total of 3.35 trillion yuan (US$476 billion) of government bonds will be sold to fund a plethora of key projects next year. 

“History has shown that fiscal stimulus measures are very effective to ameliorate an economic slump, which the country did in the aftermath of the 1998 Asian financial crisis and the 2008-09 global financial crisis,” the article added.

However, the Global Times piece misses the mark on this point. There is a stark difference between a recession caused by economic developments, even the unusual 2008-09 recession which started in the U.S. due to the subprime housing loan debacle, and a prolonged trade war between the world’s two largest economies due to flagrant trade violations and what can only be called cheating on an unprecedented scale by a major world power. Suffice it to say, the 16 month trade war, despite rhetoric that it’s “Trump’s trade war” is due to trade irregularities, wide spread mercantilism, World Trade Organization (WTO) violations, intellectual property theft and a host of other violations caused by the Chinese side.

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