Brent crude climbed back above $62/barrel in intraday trade toward the end of October, before heading back down again, owing to concerns about weak Chinese industrial growth, following data showing Chinese industrial company profits had fallen for the second month in a row. Earlier data put India’s oil imports in September at three-year lows. India and China have over the past decade accounted for more than 50% of global oil demand growth.

Nonetheless, the earlier optimism suggests that given the right conditions, oil prices could shrug off the current weakness engendered by a slowing global economy, but it will be an uphill and uncertain struggle prone to reversal.

Trade talks

The US-China trade talks appear to be making progress, although the pattern of the recent past has been one of sudden breakdowns, followed by the US upping the ante and piling on more tariff pressure, resulting in tit-for-tat Chinese responses.

For the moment, the atmospherics appear better with the ‘Phase 1’ deal essentially parking harder-to-resolve issues in the hope that some positive momentum can be created by the postponement of new tariffs and potentially the removal of some existing ones.

However, splitting the deal into easy and hard phases puts all the tough nuts to crack into one basket, while a likely softening of tariffs may reduce the economic pressure on the Chinese side to make concessions in Phase 2. Nonetheless, on balance, the next few weeks look likely to offer some positive trade news which should boost business confidence.

US resilience

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US economic indicators are likely to remain mixed. Early in the month, the Institute for Supply Management’s factory index slipped to 47.8 for September, a ten-year low, amid signs that the services sector was also beginning to weaken.

However, although sentiment in the auto sector remains weak, US manufacturing activity as shown by the purchasing managers index, released later in the month, came in above expectations and was the strongest since April, according to preliminary data.

Meanwhile, the unemployment rate also trended lower in September to just 3.5%, a remarkable 50-year low, with 136,000 new jobs created.

With third-quarter GDP data out Wednesday expected to show a slowdown in growth from 2.0% in the second quarter, expectations have risen that the US Federal Reserve will cut interest rates for a third time when it meets the same day.

Supply-side dynamics

There are also grounds for oil price support on the supply side. Although the real challenge for OPEC in the first-half of 2020 is the combination of rising US and other non-OPEC crude production, it can at least expect some slowdown in the US shale juggernaut’s growth rate. The Baker Hughes US oil rig count dropped to 696 October 25, down 17 from the week before and 181 active rigs below the start of the year, indicating slowly contracting activity.

US shale production expands and contracts like a sine curve as the losses from legacy wells gather pace in a downturn, feeding off the prior period of expansion, and the gains from new wells fall as fewer wells are drilled.

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The US Energy Information Administration’s October Drilling Productivity Report suggests net gains from the country’s main shale plays in November will be 58,000 b/d, down from 74,000 b/d in October and 85,000 b/d in September. Legacy losses have not yet picked up by much and the change in net gains is, for the moment, mainly a function of a reduced number of well completions.

In tandem with a slowing US oil sector, OPEC is raising expectations that it may cut production further when it meets next in December. A meeting of the OPEC+ Joint Technical Committee, which monitors the output agreement currently in place, is expected to make its recommendations known in November.

For now, Riyadh is putting the focus on Iraq and Nigeria’s non-compliance with the existing deal in an effort to boost OPEC’s cohesion ahead of any further action.

Iraqi stability

Mass protests in Iraq against government corruption and low living standards, alongside a potential opening for Islamic State in Syria, following the withdrawal of US troops, have revived concerns over the country’s stability. Successive administrations have failed to turn rising oil production and revenue into improvements in the lives of ordinary Iraqis.

Iraqi crude oil production has nearly doubled over the last decade to a point where it is again hitting the limits of export constraints and internal capacities, for example, the supply of water. Should it overcome these constraints, accommodating its oil production will be difficult for OPEC in the longer term, particularly so in a slow-growing market.

But the flip side is that internal instability could once again threaten Iraq’s current production levels and throw off course future expected rises in the country’s crude output.

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