Oil prices eased Thursday even though U.S. President Donald Trump said he’d lower tariffs on China. The announcement came after a meeting with President Xi Jinping in South Korea, but traders weren’t buying the optimism. There was plenty of scepticism about whether this really marked an end to the trade war that’s been dragging down markets for months now.
Brent crude futures fell 20 cents – that’s 0.31% – landing at $64.72 a barrel by 0642 GMT. U.S. West Texas Intermediate crude futures dropped by 20 cents too, or 0.33%, settling at $60.28. This happened despite the fact that Wednesday saw Brent risen 52 cents and WTI climbing 33 cents the day earlier. So what gives?
Here’s what Trump agreed to: reduce tariffs on China to 47% from 57%. Sounds decent, right? It’s a one-year deal where Beijing starts resuming U.S. soybean purchases, keeps rare earths exports flowing, and promises cracking down on the illicit trade of fentanyl. That’s the exchange both sides said they could live with.
But Vandana Hari, who runs Vanda Insights – an oil market analysis provider – wasn’t impressed. The founder put it bluntly: “The market can now see it for what it is, sans all the build-up and political window-dressing.” She said it’s “nothing more than a pause in fighting and minor de-escalation that was being touted as a trade deal.” That pretty much sums up why oil prices didn’t exactly soar on the news.
Also helping lift things a bit was the U.S. Federal Reserve, which lowered interest rates Wednesday like everyone expected. In line with market expectations, the Fed made its move. However – and this is a big however – they signalled this might be the last cut of the year. Why? The ongoing government shutdown threatens data availability, making it hard for them to figure out what’s actually happening in the economy.
Claudio Galimberti over at Rystad Energy – he’s their chief economist – wrote in a note that “the Fed’s decision underscores a broader turn in its policy cycle.” He sees it as “one that favours gradual reflation and support over restraint, providing a tailwind to commodities sensitive to economic activity.” Translation: cheaper money should help oil and other commodities, at least in theory.
Now here’s where things get interesting. The gains we saw Wednesday for Brent and WTI in the previous session actually made sense when you looked at the numbers. They reflected a larger-than-expected drawdown in U.S. crude and fuel inventories – way bigger than anyone thought.
The Energy Information Administration said U.S. crude inventories dropped by 6.86 million barrels to 416 million barrels in the week ended October 24. Analysts polled by Reuters had expected maybe a 211,000-barrel fall. That’s a massive difference. When you compared the actual numbers with analysts’ expectations, it wasn’t even close.
Both benchmarks are still on track for ugly numbers this month. We’re looking at declines of more than 3% in October, which would make it their third consecutive month of losses. That’s not a good trend if you’re holding crude.
There are real concerns about demand, and the trade situation isn’t helping. Despite that big inventory drawdown, the market clearly thinks there’s more bad news ahead. Traders are nervous, and you can see it in how prices are moving – or not moving – on what should be positive developments.
Another key focal point for investors is what OPEC+ does next. They’ve got a meeting scheduled for November 2, and the alliance will likely announce another 137,000 barrels per day increase – that’s bpd in industry speak – for their December supply hike.
The group has been busy boosting output targets all year. We’re talking a total of more than 2.7 million bpd, or about 2.5% of global supply, spread across a series of monthly increases since April. That’s just under half the 5.85 million bpd cumulative cuts in supply the group had agreed to in preceding years. So they’re basically undoing their earlier production cuts, bit by bit. The alliance seems confident the market can handle more oil, but current prices suggest maybe they’re being too optimistic.
Look, Trump and Xi had their moment in South Korea. They shook hands, talked about tariffs coming down from 57% to 47%, and everyone smiled for the cameras. Beijing gets to sell more stuff to America, Washington gets promises on soybeans and fighting fentanyl trafficking. Sounds like progress.
But Vandana Hari nailed it when she talked about the political window-dressing. This one-year deal doesn’t solve the fundamental issues. It’s a temporary truce, not peace. The market knows it, which is why oil prices eased instead of jumping.
The Fed’s rate cut should help. Lower interest rates usually boost commodities because they make borrowing cheaper and can stimulate economic activity. Claudio Galimberti thinks this policy cycle shift matters. But when the Fed immediately says this might be their last move because of data problems from the shutdown, that confidence evaporates pretty quickly.
Numbers Don’t Lie
When U.S. crude inventories dropped that much – remember, 6.86 million barrels versus expectations of barely 211,000 barrels – that should have sent prices flying. Big inventory drawdowns mean demand is strong or supply is tight. Either way, it’s bullish for oil. Yet here we are, watching Brent and WTI give back their Wednesday gains the very next day. Both benchmarks heading for their third straight month of losses in October. The market is clearly more worried about what’s coming than what just happened.
Looking Ahead
The OPEC+ meeting on November 2 could shake things up. If the alliance goes ahead with that 137,000 bpd increase for December, it’ll be another sign they’re not too worried about prices. They’ve already added back 2.7 million bpd this year – about 2.5% of what the world uses every day.
That’s a lot of oil coming back after those big 5.85 million bpd cuts they agreed on before. The group clearly thinks demand can absorb it. But with trade tensions still simmering despite Trump’s deal, and the Fed hitting pause on rate cuts, you have to wonder if they’re reading the room right.
Oil prices don’t move on headlines alone. They move on fundamentals, on real supply and demand. Right now, the fundamentals look shaky. A minor de-escalation in the trade war and a Fed rate cut that might be the last one for a while – that’s not exactly the recipe for a sustained rally in crude prices.
