Oil posts biggest yearly rise since 2016 on supply cuts, US-China trade deal

New York

OIL prices fell 1 per cent on Tuesday, the last trading day of the decade, but notched the biggest annual gain in three years, supported by a thaw in the prolonged US-China trade war and ongoing supply cuts from major oil producers.

Brent gained about 23 per cent in 2019 and WTI rose 34 per cent, their biggest yearly gains in three years, backed by the recent breakthrough in the trade talks and output cuts pledged by the Organization of the Petroleum Exporting Countries (Opec) and its allies.

Forecasters do not expect oil prices to move sharply in either direction this year. Brent crude is expected to hover around US$63 a barrel, a Reuters poll showed on Tuesday, down modestly from current levels, as Opec production cuts offset weaker demand.

Over the past year, increased US oil output offset the supply reductions undertaken by Opec, led by Saudi Arabia and stemming from US sanctions on Venezuela and Iran. Lacklustre demand, including in developed economies, remains a primary concern headed into 2020.

"Oil prices, though largely expected to trade positive, will face headwinds from subdued global growth momentum and robust US shale output levels in the first quarter of 2020," said Benjamin Lu, an analyst at Phillip Futures.

US crude oil production in October rose to a record of 12.66 million barrels per day (bpd) from a revised 12.48 million bpd in September, the US government said in a monthly report.

The pace of growth is expected to slow in 2020.

Brent crude fell 67 cents or 1 per cent to settle at US$66 a barrel. US West Texas Intermediate crude fell 62 cents or 1 per cent to settle at US$61.06 a barrel.

On Tuesday, trade volumes were low with many market participants away for year-end holidays, amplifying the market's moves.

US President Donald Trump said the "Phase One" trade deal with China would be signed on Jan 15 at the White House.

Signs of progress on the deal had boosted China's factory output and manufacturing activity, expanding for a second straight month.

China's Purchasing Managers' Index, which tracks economic trends in the manufacturing and service sectors, was unchanged at 50.2 in December from November, just above the 50-point mark separating growth from contraction.

Investors were nervous about the Middle East, where thousands of protesters and militia fighters gathered outside the US embassy in Baghdad to condemn US air strikes against Iraqi militias.

Security guards inside the embassy fired stun grenades at protesters. The US ambassador and staff were evacuated due to security concerns.

"Considering that Iraq is the second-largest Opec producer with production around 4.6 million barrels per day, market participants may add a risk premium to oil tension if tensions last longer," UBS oil analyst Giovanni Staunovo said.

"That said, we need to see if the latest protests spread also in the south of the country, where most of the crude is exported," he added.

On Tuesday, data from industry group the American Petroleum Institute showed US crude oil stocks fell by 7.8 million barrels in the week to Dec 27, compared with analysts' expectations for a draw of 3.2 million barrels. REUTERS