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Crude Rally On Hold

U.S. West Texas Intermediate crude oil futures are trading higher on Friday, however, the market is still in a position to close lower for the week. The market opened on its high this week, but sellers came in quickly to stop the move, producing a potentially bearish closing price reversal top in the process.  

The selling was primarily driven by two factors:  worries over a global economic slowdown and renewed concerns over U.S.-China relations. Underpinning the market were the OPEC-led supply cuts and political turmoil in Venezuela, which could lead to a supply disruption.

Global Economic Slowdown Caps Gains

The wave of selling pressure shortly after the opening this week was fueled by China’s weak GDP data and a report from the International Monetary Fund (IMF) that forecast a slowdown in the global economy in 2019 and 2020.

The theme throughout the week was the weakening global economy which translates into lower demand for crude oil. Supporting this idea were remarks from a couple of central banks this week to go along with previous central bank concerns about an economic slowdown.

The U.S. Federal Reserve is already on record saying it would be willing to take a pause in rate hikes if the economy continues to sputter. On Wednesday, the Bank of Japan kept its ultra-loose monetary policy unchanged. It also cut its inflation forecasts and warned of growing risks to the economy from trade protectionism and slowing global demand.…

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  • Mamdouh Salameh on January 27 2019 said:
    Despite claims about a slowdown in the global economy, there is no sign yet to substantiate such claims. The fundamentals of the global economy are still robust in terms of a global economy projected to grow this year at a healthy 3.5%, global oil demand adding 1.4 million barrels a day (mbd) over 2018 and rising Chinese crude oil imports. Moreover, the OPEC+ production cuts are starting to permeate the global oil market and impact on prices. Saudi Arabia and OPEC are determined to ensure that the cuts will do the trick and reduce the glut in the market. These fundamentals could sustain an oil price higher than $80 a barrel.

    Talk about China’s economy slowing down is based on fickle and unsubstantiated premises. China’s GDP grew in 2018 at a very healthy rate of 6.6% exactly as it was projected at the start of 2018 and is also projected to grow at a similar rate this year.

    Moreover, China’s oil imports rose in 2018 by more than 24% from 8.43 million barrels a day (mbd) in 2017 to 10.43 mbd and are projected to hit 11 mbd this year. This is not a sign of slowing down economy. Furthermore, China’s economy is now a mature economy so it is not expected to continue growing at a range of 9%-12% as was the case in the 1990s and the first decade of the 21st century. Still, an annualized growth of 6.6% for the world’s largest economy based on purchasing power parity (PPP) is an astounding growth when compared with a 2.5%-3.00% for the United States and 2% for the European Union (EU).

    There are indications that both the United States and China are wanting an end to the trade war between them. President Trump has at last realized that the trade war was hurting the US economy far more than China’s since the Chinese economy is bigger and far more integrated in the global trade system than the United States’.

    The recent events in Venezuela will hardly impact oil prices unless the country’s oil production which has been in steady decline for a while collapses completely as a result of a full-scale strike in PDVSA or a civil war in the country. However, China and Russia who between them are owed more than $30 bn worth of investment will do everything possible to prevent a collapse of Venezuela’s economy.

    One bullish factor will, however, be at play in 2019, namely the numerous and very reliable reports coming thick and fast of a slowdown in US shale oil production the latest of which is a suggestion by a pioneer of the US shale oil industry like Continental Resources’ Harold Hamm that growth in US shale oil production could decline by as much as 50% this year compared to 2018. Also a report from the world’s largest oilfield services company ‘Schlumberger’ says that the slowdown in shale drilling activity is creating uncertain outlook for US shale oil output in 2019.

    Still, there will also be one bearish element at play this year. It is the realization by the global oil market that US sanctions have so far failed to cost Iranian crude oil exports the loss of even a single barrel of oil thus discounting the possibility a supply deficit.

    Furthermore, The United States has no alternative but to renew the sanction waivers it granted to eight countries in November last year when they expire in May this year or issue new ones if only for the Trump administration to use them as a fig leaf to mask the fact that their zero exports option is out of reach and that the sanctions are doomed to fail.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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