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Oil Trading in Sweet Spot Adds to Improving Economic Signals -- Update

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12/03/2019 | 10:02am EST

By Amrith Ramkumar

Oil prices have stayed in a contained range that analysts say benefits both producers and consumers, bolstering hopes that the global economy can rebound.

U.S. crude has generally stayed between $50 and $60 a barrel in the past six months and is on pace for its best year since 2016 following a sharp selloff late in 2018. Brent, the global gauge of prices, has also been steady and traded between $55 and $65.

Because it is critical for the transportation and shipping industries, oil is used by some investors to gauge momentum in the economy. Prices had sent an alarming signal when they tumbled earlier in the year, hurt by worries that crumbling demand would result in a glut. But recent progress toward an initial U.S.-China trade accord and stabilizing economic data around the globe have fueled bets on an improving picture for consumption.

The stability is a boon for large energy producers world-wide, many of which have curbed output to boost prices. Saudi Arabia's state-owned oil company, known as Aramco, is expected to go public in the coming days and is seeking a valuation of $1.6 trillion to $1.7 trillion, which could make it the largest initial public offering ever. Saudi Arabia is the world's largest crude exporter and is expected to join other large producers in OPEC in extending production cuts when the group meets later this week in Vienna.

While oil is still well below its April highs, some analysts say prices are high enough to support profits at some energy companies without dramatically increasing gasoline costs for consumers and imperiling economic growth. Coupled with gains in stocks, Treasury yields and industrial metals such as copper that are crucial to manufacturing, the oil-price movements also show how investors have turned optimistic after fearing a recession just four months ago.

"More and more people are starting to believe things are getting better, " said Nathan Thooft, head of global asset allocation at Manulife Investment Management. "An oil price that is climbing based on better sentiment is fine as long as it doesn't get out of control...We have some room before it would cause any alarm bells to start ringing."

Mr. Thooft holds a larger position in stocks than the benchmark he tracks, believing the recession fears that hurt markets earlier in 2019 were overblown.

Worries about a sharp economic slowdown have intensified again in recent days with President Trump suggesting a trade war with China could drag on past next year's election and raising tariffs on steel and aluminum imports from Brazil and Argentina. Stocks fell for the third consecutive session Tuesday, while oil inched lower.

Similar fears had hit oil much harder earlier in the year, with many analysts expecting crude from smaller producers Norway, Brazil and Guyana to exacerbate supply surpluses in 2020. Now, the combination of improving demand and lower-than-expected output from OPEC and U.S. shale producers has given some investors confidence prices can remain stable.

"Certainly it feels better today than it did three months ago, six months ago," said Noah Barrett, an energy research analyst at Janus Henderson Investors, which favors companies like EOG Resources Inc. the firm believes can still generate solid earnings even if crude prices pull back. "We look pretty well balanced in 2020."

Net bets on higher U.S. crude prices by hedge funds and other speculative investors rose to their highest level in two months during the week ended Nov. 26, Commodity Futures Trading Commission figures show. The ratio of bullish bets to bets on lower prices is nearly 6:1, well below April's peaks but still much higher than it was in mid-October.

In another optimistic sign, front-month crude futures now exceed prices for delivery in future months. This condition encourages traders to sell oil rather than store it, helping avoid a buildup that could hurt prices. It also means investors don't incur a "roll cost," the premium to buy next month's futures when the current contract expires.

"Investor sentiment is slowly starting to change," said Abhishek Deshpande, head of oil-market research and strategy at JPMorgan Chase. "At this stage they're saying, 'OK, maybe there's a chance of a better return in oil.' "

Mr. Deshpande now projects global oil supply to trail demand in two quarters next year, after in June projecting production to exceed consumption in each quarter of 2020.

The improved mood has spread to shares of some producers. The S&P 500 energy sector has risen 1.6% in the past three months, trimming some of its drop in the past year. Shares of companies such as Pioneer Natural Resources Co. and Cimarex Energy Co. that have pledged restraint with spending in 2020 are among those that have rebounded slightly.

"I'm definitely becoming more optimistic that we're probably at the bottom end of the cycle regarding oil price," Pioneer Chief Executive Scott Sheffield said on the company's third-quarter earnings call Nov. 5.

Still, some analysts remain wary of another reversal, particularly if snags in trade talks prompt a retreat from riskier investments. U.S. production has climbed to fresh records in recent weeks, even as the number of rigs drilling for oil drops, keeping inventories plentiful. And stockpiles in developed nations also remain well supplied, increasing focus on indicators of fuel demand.

"You could see this view change very quickly," Mr. Deshpande said.

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Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL -0.46% 26957.59 Delayed Quote.-2.02%
NASDAQ 100 0.44% 8873.757047 Delayed Quote.8.17%
NASDAQ COMP. 0.17% 8980.774761 Delayed Quote.6.73%
S&P 500 -0.38% 3116.39 Delayed Quote.-0.15%
SAUDI ARABIAN OIL COMPANY -1.91% 33.4 End-of-day quote.-1.62%
WTI -3.07% 48.62 Delayed Quote.-12.86%
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