SIA Weekly: Potential Disruptions to Trade and the Trend Higher in Crude Oil

Trading in world markets over the last week has been dominated by two major themes. First, the impact of President Trumpā€™s ongoing trade war threats are increasing international market volatility. Second, the price of oil continuing to climb, particularly in the United States, even after OPEC announced more supply is on the way.

The current fortnight marks the end of the first half of the year, the start of summer vacation season, and includes national holidays in the US and Canada (July 2 and 4) next week. Itā€™s not uncommon at this time of year for investors to assess their portfolios relative to expectations, and reposition their holdings as needed before the summer. Corporate news flow is light at the leaving investors with little to react to so external events have a bigger impact on sentiment. July earnings season is still a few weeks away which often historically coincides with a bounce for stocks. Confession season, the time of the quarter when profit warnings are more common, has been quiet so far suggesting managements appear confident about hitting their targets and guidance.

In this weekā€™s issue of SIA Equity Leaders Weekly, we look at the impact escalating rhetoric over trade between the US and China has taken Chinese stocks using the Hang Seng Index Futures as a proxy. We also look at WTI Crude Oil within its longer-term context.

Hang Seng Continuous Contract (HS.F)

With the contentious G7 summit fading into history, US President Trump has turned his sights back to China as his main trade war adversary. The president has been threatening to continue ramping up tariffs against China should it retaliate against his tariff increases. Trump also has threatened to take steps to block Chinese investment in US technology companies, although he appears to have subsequently backed off.

Speculation that the US may be trying to disrupt Chinaā€™s long-term industrial growth plan and block another big economic competitor from emerging appears to have taken its toll on the Hang Seng Index. Like other major world indices, a big 2017 advance ran out of gas last winter. Following an initial downdraft, the index settled into a sideways trading range between 29,225 and 31,650. While big cap US indices remain range bound and more broad based US indices like the Russell 2000 have reached new highs in recent weeks, the Hang Seng has gone in the opposite direction.

First, the drop under 30,000 broke an uptrend support line, then the recent breakdown below 29,225 took out the bottom of its trading range and completed a bearish Spread Triple Bottom pattern. Combined, these breakdowns have signaled the start of a new downleg. Next potential support may appear near 28,000 then 26,400.

 

 

WTI Crude Oil Continuous Contract (CL.F)

This long-term chart highlights the strength of the current uptrend in the WTI oil price. In the last week, WTI has been in rally mode, reclaiming the $70.00/bbl level, advancing on its previous high near $72.50, and narrowing its discount relative to Brent Crude.

While Brent crude has been flopping around since OPEC announced supply increases last Friday, big drops in US inventories this week have ignited big gains for the US oil price. This week, both the American Petroleum Institute and the Department Of Energy announced drawdowns of over 9 million barrels from US stockpiles, much larger than the street was expecting.

The big declines in US inventories of late are being driven by a combination of supply constraints kicking in at a time of rising demand.

On the demand side, the US economy remains strong, driving increased energy consumption. Yesterday, the US durable goods orders report showed a May decline of 0.6% which was not as bad as the 1.0% decline the street had expected, while April orders were revised upward by 0.7%.

The supply side appears to be having an even bigger impact on oil prices at the moment. Although OPEC and partners including Russia announced plans to increase production by 1.0 mmbbl per day and Saudi Arabia is reportedly ramping up its production to record levels in July, that doesnā€™t appear to be enough to offset shortfalls elsewhere.

While increased pressure from the US on allies to stop importing Iranian oil before new sanctions kick in later this year is capturing most of the attention in the media, the North American (WTI) price and US inventories are likely being more impacted by supply considerations closer to home.

The recent power outage at the Syncrude oil sands facility appears likely to limit supply from a big producer through July, and US production growth may not be enough to overcome this supply shortfall in the short term. The potential for supply curtailments from Venezuela, Libya and Nigeria also limits the upside for supply into the oil market in the near term.

On a breakout, next potential upside resistance may appear near the $75.00 or $80.00 round numbers, then closer to $82.50 level based on past history. Initial support is found around $60.24 level.

 

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