• 5 minutes Iran Says It Arrested 17 CIA Spies, Some Sentenced To Death
  • 9 minutes Will We Ever See 100$+ OIL?
  • 13 minutes Iran downs US drone. No military response . . Just Destroy their economy. Can Senator Kerry be tried for aiding enemy ?
  • 2 hours Iran Loses $130,000,000 Oil Revenue Every Day They Continue Their Games . . . .Opportunity Lost . . . Will Never Get It Back. . . . . LOL .
  • 10 hours Oil Giant Saudi Arabia Is Set to Start First Wind-Power Plant
  • 4 hours How is E&P of Marginal Oil on the UKCS Similar to the Shale Oil Operations in the US?
  • 14 mins Renewables provided only about 4% of total global energy needs in 2018
  • 7 hours So You Think We’re Reducing Fossil Fuel? — Think Again
  • 5 hours Berkeley becomes first U.S. city to ban natural gas in new homes
  • 9 hours EIA Reports Are Fraudulent : EIA Is Conspiring With Trump To Keep Oil Prices Low
  • 5 hours N.Y. Governor Signs Climate Bill
  • 20 hours First limpet mines . . . . now fly a drone at low altitude directly at U.S. Navy ship. Think Iran wanted it taken out ? Maybe ? YES
  • 19 hours Today in Energy
  • 16 hours Which is a better domain name for OAPEC?
  • 3 hours U.S. Administration Moves To End Asylum Protections For Central Americans
  • 13 hours Shale Oil will it self destruct?
Alt Text

Russian Crude Could Still Be Dirty By Mid-2020

Polish refiner PKN Orlen has…

Alt Text

The Only OPEC Member That Could Challenge Saudi Oil Dominance

Iraq, OPEC’s second biggest producer,…

Alt Text

Will The U.S Gas Glut Cap Oil Production?

The gas flaring crisis in…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Premium Content

The Demand Downside For Oil Prices

Oil supply outages are multiplying around the world and are likely to grow worse in the second half of 2018. The disruptions reduce the odds of a supply-driven slide in oil prices. However, the prospect of a downturn due to a meltdown in demand is still a possibility.

Concrete evidence of souring oil demand has not yet materialized, but warning signs for the global economy are starting to proliferate.

The fallout from a global trade war is also growing by the day, with tit-for-tat measures spreading like wildfire. The U.S. has imposed tariffs on China, the EU, Canada and Mexico, and all have retaliated. The Trump administration has threatened to double down with more tariffs unless those countries relent.

The latest from Washington was a proposal to restrict China from investing in U.S. technology companies, although after Monday’s stock market turmoil, the Trump administration has backed off that approach after U.S. businesses voiced fears of economic damage.

Still, threats of new U.S. tariffs on automobiles from Europe, plus more tariffs on Chinese imports, ensure that the trade fights are not going away. Also, Canada is preparing tariffs on imported steel from China in an effort to prevent Chinese steel that can no longer make it to the U.S. from being dumped in Canada.

Up until now, the financial markets have shrugged off the trade war, but in recent days stocks have been rattled by fears of economic disruption as the protectionist measures pile up. “A significant slowdown in trade would materially deteriorate the global growth outlook with repercussions for risky assets,” UniCredit Bank said in a note, singling out emerging markets as particularly at risk.

“While we have been inclined to discount previous trade rhetoric, we are now taking a more defensive view,” Goldman Sachs wrote in a note. Related: The Saudis Won’t Prevent The Next Oil Shock

Even the oil and gas industry is concerned about the trade war. “The risk of trade skirmishes or trade wars starts to weigh on people’s perceptions of economic growth in the future,” Chevron CEO Mike Wirth said in a panel discussion with Exxon chief Darren Woods at a natural gas conference in Washington. “From a demand standpoint I think that’s a risk.”

Exxon’s Darren Woods agreed, but went on to say that Trump’s tariffs also scramble the economics of new oil and gas projects. They “are steel intensive projects. When tariffs come on and with threats of a trade war, you risk making those projects less competitive and less attractive,” Woods said.

However, trade fights are not the only looming threats for the health of the economy. Rising interest rates and a strengthening U.S. dollar are applying pressure to emerging markets, putting currencies at risk and forcing governments around the world to burn through cash reserves and/or hike interest rates, which could help defend their currencies, but also exposes them to an economic slowdown. The dollar is set to close out the second quarter with one of its best performances in two years.

Goldman Sachs said that it was cutting its overweight position in emerging market currencies after a horrific few weeks that saw sharp selloffs in currencies around the world. A stronger dollar will make dollar-denominated debt harder to service, increasing the odds of defaults.

China’s yuan is taking a beating which stems largely from the trade war. China keeps a heavy hand on its currency, so the yuan doesn’t fluctuate much, but it has declined 3 percent over the past two weeks. Analysts speculate that China might be allowing the currency to weaken as it comes under pressure, a strategy that will help keep exports competitive amid U.S. tariffs as well as avoid burning through cash reserves. But it raises concerns about capital flight and a slowdown, which could spill over to other emerging markets.

“A 10 percent depreciation could offset the additional tariffs at a 10 percent rate, although not without significant risks, including exacerbating outflows,” Alex Wolf, senior emerging markets economist at Aberdeen Standard Investments, wrote in a note. “There are no costless options, but hopefully we don’t reach that point.” Related: Moon Fuel: A New Multi-Trillion Dollar Treasure

China’s Shanghai Composite Index entered bear market territory this week.

In short, there are signs of slowing growth in China, in Europe and in other emerging markets. So far, the U.S. economy has held up, but “global synchronized growth” looks like it could be coming to an end. Moreover, the coming “inverted yield curve,” in which short-term interest rates on U.S. Treasuries rise above longer-dated bonds, is a dangerous sign that even the U.S. economy might be heading for recession.

An economic slowdown, whether it comes from a trade war, an emerging market downturn or for any other reason, would have enormous ramifications for the oil market. Oil prices at close-to-three-year-highs is only possible because of robust demand growth, and bullish forecasts going forward hinge on continued demand growth. Most analysts haven’t changed their demand forecasts for 2018 and 2019 just yet, although the IEA downgraded its assessment by 100,000 bpd in May.

If the global economy hits more speed bumps, demand could begin to slowdown, which would drag down oil prices.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play