Oil prices drop but set for weekly gain

Sterling climbs vs euro

LONDON, Sept 1, (RTRS): Oil prices gave back some of their recent gains on Friday, but were still headed for the biggest weekly increase since early July, boosted by an easing of US-China trade rhetoric, a decline in US stockpiles and a looming hurricane in Florida.

Brent crude was down 54 cents, or 0.88%, at $60.54 a barrel, by 1425 GMT, but was heading for a gain of nearly 2% for the week.

US West Texas Intermediate (WTI) crude futures fell $1.49 cents, or 2.63%, to $55.22 a barrel. The contract is also set for a gain of nearly 2% this week.

Worries about a slowdown in economic growth and the impact on oil demand due to the trade war between the world’s two biggest oil consumers kept a lid on price gains this week, even as falling inventories indicated a balancing market.

“Upside momentum should not be taken for granted. Recession fears are casting a shadow on sentiment and oil prices should keep dancing to the tune of the US-China trade saga,” said Stephen Brennock of oil broker PVM.

On Thursday, the United States and China gave signs that they will resume trade talks, discussing the next round of in-person negotiations in September ahead of a looming deadline for additional US tariffs.

“The calm is somewhat deceptive as financial markets are still making up their mind on the question of slowdown or downturn,” said Norbert Ruecker of Swiss bank Julius Baer.

“Both growth and oil demand are set to remain lacklustre and thus supplies look ample well into 2020.”

Analysts polled by Reuters slashed their price forecasts for Brent to an average of $65.02 in 2019 – the lowest in more than 16 months - citing softening global demand brought on by an economic slowdown and the trade row.

The approach of Hurricane Dorian towards Florida raised fears that offshore US crude producers may suspend output if the storm passes into the Gulf of Mexico over the weekend.

Dorian is heading for landfall on the Atlantic coast of Florida at the weekend and may enter the eastern Gulf of Mexico next week. It is forecast to strengthen and become more powerful on Sunday, the National Hurricane Center said.

Government data on Wednesday showed US crude stocks dropped last week by 10 million barrels to their lowest since October as imports slowed, while gasoline and distillate stocks each fell by over 2 million barrels.

But the EIA data also showed that US production rebounded to a weekly record of 12.5 million barrels per day, suggesting there is still plenty of supply available.

Meanwhile, the pound extended gains against the euro on Friday, putting it firmly on track for its biggest monthly rise since February as a broad-based drop in the single currency against its rivals encouraged investors to buy the British unit.

The euro fell more than 0.5% drop against the Japanese yen and the Australian dollar, but the pound’s gains against the single currency were contained as investors braced for a tense opening to the British parliament next week.

Though the pound is still above a 2-1/2 year low of $1.2015 it reached this month, it could see bigger moves with action around the Brexit crisis during the parliamentary session. That will last until Sept 9-11, before a one-month suspension following Prime Minister Boris Johnson’s controversial move to prorogue parliament.

The opposition Labour Party said this week it would trigger an emergency parliamentary debate next week to try to stop Johnson taking Britain out of the European Union without a withdrawal deal.

Some of the moves in the pound were partly exaggerated in typical Friday afternoon trading.

“Though the threat of a no-deal Brexit is higher than before, extreme short positioning has been partially the reason for its strength and also some investors see value in the pound around these levels,” said Neil Mellor, a senior FX strategist at BNY Mellon in London.

Some money managers even sense an opportunity, believing the British currency is cheap, and the government’s gambit could make clinching a new withdrawal deal with the EU more likely.

Versus the euro, the pound gained 0.4% to 90.38 pence. On a monthly basis, the pound is set to rise 0.8%, its biggest monthly rise since February against the euro.

On a weekly basis, the British currency is set for a third consecutive weekly rise versus the euro.

Despite this week’s events, most big banks still see a no-deal Brexit on Oct. 31 as an unlikely outcome. Some such as JP Morgan assess that probability at 35% - up from a previous 25% - while others such as Nomura and Deutsche Bank put it at between 40%-50%.

UBS Wealth Management believes the market is pricing in a higher probability of around 50% for a no-deal Brexit which UBS considers too high, prompting the money manager to be tactically bullish on the pound versus the greenback.

The median forecast for a disorderly Brexit – whereby no deal is agreed – jumped in an Aug 2-7 Reuters poll of economists to 35%, up from 30% given in July and the highest since Reuters began asking this question two years ago.