Oil Markets Poised To Rise With U.S.-China Trade Deal

The price of the U.S. oil benchmark, WTI, hit nearly a 3-month high on Monday reaching $60.21 per barrel on news that China and the U.S. agreed to Phase One of a trade deal.

Oil Markets Poised To Rise With U.S.-China Trade Deal

In this file photo taken on June 28, 2019, China’s President Xi Jinping (R) shakes hands with US … [+] President Donald Trump before a bilateral meeting on the sidelines of the G20 Summit in Osaka. BRENDAN SMIALOWSKI/AFP via Getty Images)

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For months, oil prices have hinged on positive or negative news of the U.S.-China trade negotiations. It was expected that markets would respond positively to such news. The U.S. is now set to roll back tariffs on some Chinese goods in exchange for major Chinese purchases of American agricultural products. The news is clearly good for oil, as this stage of the deal should stimulate more trade improve the economy.

However, oil markets are clearly hesitant to take the positive news too seriously—and for good reason.

A sustained economic growth in the U.S. won’t materialize immediately. In fact, in may take several months until the effects of this deal show up in U.S. agricultural indicators. One of the important economic indicators to look for in this respect will be distillate fuel purchases. Consumption of distillate, which is also known as diesel fuel which is used in trucking and by tractors, has been lagging in the U.S. ever since Chinese demand for U.S. agricultural products dropped off as a result of the trade war. An uptick in distillate demand could be an early indicator that the U.S. agricultural industry is picking up as a result of this trade deal, as farmers gear up to grow more crops and rear more animals to transport to China. However, the first quarter of the new year is traditionally a time of low demand.

In the long run, the U.S.-China Phase One trade deal is only a positive for the global economy and thus for the price of oil. Speculators and traders cannot be criticized for being cautious after so much teetering between positive and negative trade news over the last few years. But the oil market is poised to go up if and when positive indicators start arriving.

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