Energy Prospectus

Helping to support oil prices this week despite the build in crude stocks was an unexpected halt to production in the Buzzard Field in the North Sea. A note from Baird Wednesday suggested that the shutdown may have been for repairs, which temporarily halted production of Forties, the most important of the four crude streams underpinning Brent prices.

“This [180 MBOPD] outage more than offsets the increase in oil production in Libya,” Carsten Fritsch of Commerzbank said, referring to the recovery in output at Libya’s Sharara field. “Now, it seems that crude oil stocks have peaked at least and are starting to decline,” he added.

Some uncertainty remains around whether or not the OPEC and non-OPEC members cooperating with the group will continue cuts into the second half of the year, but JBC Energy indicated that stocks may draw down either way.

“In the event of OPEC/non-OPEC not extending the cuts into the second half, the world would still continue to draw stocks at a mild pace of about 200,000 bpd until September, thereby lending support to prices one way or another,” JBC said.

Markets are also closely watching the U.S. Federal Reserve and President Trump’s upcoming meeting with his Chinese counterpart Xi Jinping to see which direction the dollar will go. Dollar-denominated commodities like oil become more expensive for foreign buyers as the dollar strengthens against other currencies.

The Fed has indicated that it plans to tighten monetary policy this year and raise interest rates, which would cause the dollar to appreciate against other currencies. The potential rate hikes, along with any signs of a formal discussion on reducing the size of the bank’s balance sheet, could affect the value of the dollar.

Concerns over a North Korean missile test worsened sentiment ahead of the summit between the U.S. and China, weakening the dollar this week. The dollar index, which tracks the U.S. currency against a trade-weighted basket of six peers, was slightly weaker on the day, as slumping U.S. Treasury yields also gave investors little incentive to buy dollars, reported Reuters.

Topping the agenda at Trump’s Mar-a-Lago resort in Florida will be whether he makes good on his threat to use U.S.-China trade ties to pressure Beijing to do more to rein in its nuclear-armed neighbor North Korea, which is working to develop missiles capable of hitting the United States.

“The meetings are expected to be informal, unscripted discussions of how the two countries will address, but not immediately resolve, their differences,” said strategists at Morgan Stanley in a note to clients.

“Any commentary on how the U.S. specifically wants to try to reduce the trade deficit with China will be watched by FX investors,” the strategists wrote.