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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.

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What Caused Oil’s Longest Losing Streak In Years?

oil field Wafra

Oil prices seemed to have leveled off after seven consecutive weeks of weekly declines, the longest streak in years. But the next steps are unclear. In the battle over the market narrative, concerns about the health of the global economy are up against the potential for serious supply outages in Iran. A lot could change by the end of this year, but as the summer draws to a close, it isn’t clear which narrative will win out.

The fears about the global economy have moved to the front burner in recent weeks. The trade war between the U.S. and China still threatens to drag down global growth, although the news that the U.S. and China will resume talks this week for the first time since June seemed to buoy the markets. But the talks will be conducted at a lower level – the U.S. point person is an undersecretary at the Department of Treasury, not Secretary Steven Mnuchin, which raises questions about the authority to ink a deal.

More importantly, Treasury isn’t even the agency that leads on trade. That adds up to U.S. and China essentially keeping their lines of communication open, but not actively seeking a resolution in any big way, at least not from this venue.

But the talks at least increase the odds, however slightly, that the proposed $200 billion in U.S. tariffs on Chinese goods do not go forward. The U.S. Trade Representative is holding a six-day process beginning this week to look at those tariffs.

Meanwhile, the meltdown in Turkey’s currency, the lira, has set off a different source of trouble. The turmoil spread to other emerging markets, dragging down a whole host of currencies.

Weaker emerging market currencies threaten to seriously slow down demand – not just for oil, but for a range of commodities. The Bloomberg Commodities Index has declined by 3 percent this month and by more than 9 percent in the last three months. Oil prices are down by more than 10 percent since May. Of course, commodity prices might get wiped out, but the slowdown would also be true of the global economy. Related: Trump Administration Embraces Energy Dominance Agenda

“Other emerging markets have already been hit, evident through depreciating currencies, investors demanding higher yields on emerging market debt and a jump in credit default swaps on this debt,” ING wrote in a note. “However saying all of this, the US Federal Reserve seems unlikely to deviate from its plan for tighter monetary policy, which should remain supportive for the U.S. dollar, whilst growing emerging market risk adds further support to the currency.” If the Fed doesn’t let up, then the pressure on currencies around the world will continue.

It is hard to imagine that such a scenario doesn’t directly translate into a significant downward revision in global oil demand. After all, oil is priced in dollars, so a stronger dollar (and weaker currencies elsewhere) means that oil is vastly more expensive. That is especially true if oil prices are not falling (it used to be the case that the dollar and oil traded inversely, but that relationship has weakened recently).

The IEA is, for now, sticking with its forecast of oil demand growth at 1.4 million barrels per day (mb/d) for 2018. Brent oil prices are up 7 percent this year, but in local currencies the price increase is much bigger. In Turkey, oil is around 75 percent more expensive, and there has been a similar increase in Argentina. In Brazil, Russia and South Africa, oil feels about 20 to 25 percent more expensive this year, even though oil has only climbed by about 7 percent, according to ING. In Hungary, India, Poland, Chile, Indonesia and the Philippines, oil is 15 to 20 percent more expensive. And on and on. Related: Why Mexico’s Oil Production Could Fall Even Further

Price increases of that magnitude will surely cut into demand. But the picture gets muddied when governments step in to shield their countries from those price increases, ING says. In Brazil, the government decided to re-regulate fuel prices to stave off crippling protests. Indonesia announced $4.8 billion in subsidies to keep prices from rising. Malaysia also decided to fix fuel prices for the rest of 2018. These price supports could blunt the price signal from both higher global oil prices and weaker currencies, keeping demand from falling by more than it would otherwise.

Still, the story is bearish for crude. We have different things happening at the same time – the global economy is slowing (the end of synchronized growth), the U.S.-China trade war potentially acting as a major headwind and emerging market currencies dragging down demand.

The oil supply picture remains in flux, with the potential outage of 1 mb/d of Iranian supply looming. But the demand side of the story suddenly looks pretty negative.

By Nick Cunningham of Oilprice.com

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  • Jonathan on August 20 2018 said:
    Nothing changed except speculation liquidity waned during a typical boring August futures market

    Trend remains Bullish
    CoT still 10/1 Long

    Volumes will return and up we go, at the least until October Iran drama actually kicks in

    Cheers
  • Mamdouh G Salameh on August 21 2018 said:
    The US dollar and extra oil supplies by Saudi Arabia and Russia are the two factors behind the current bearish oil prices.

    The appreciating dollar against other currencies exerts a downward pressure on oil prices. Conversely, by devaluing the dollar, the actual purchasing power of the oil revenues of members of OPEC declines against other world currencies forcing them to raise oil production to maintain revenue thus depressing the oil price. The United States has been known to manipulate oil prices through alterations of the dollar value and also claims about rising US oil output and increases in the build-up of US crude and products inventories.

    The second factor is that despite evident decline in global oil inventories, the global oil market has not re-balanced completely. There is still a bit of glut capable of taking care of outages in Venezuela, Libya and elsewhere. Saudi Arabia’s and Russia’s addition of 400,000-500,000 barrels a day (b/d) to global oil supplies enhanced the remaining glut in the market and depressed oil prices.

    The escalating trade war between the US and China will not put a lid on oil. Sanctions or no sanctions, China needs vast amounts of oil to keep its economy well-oiled and functioning.

    Were the US to impose more intrusive tariffs and sanctions on China, China could easily switch to other markets around the globe. China’s economy is far more integrated in the global trade system than the US economy and also bigger by 24%. However, the US could pay a heavy price if it tries to replace Chinese exports with imports from other countries. No other country in the world could produce goods particularly high tech goods cheaper than China. Replacing Chinese exports will lead to higher prices for US customers and also higher inflation in the United States. This will definitely offset any benefits from the tax cuts, worsen US budget deficit and increase US outstanding debts by an estimated 2.35%. Furthermore, China’s purchases of US shale/tight oil and LNG could come to an end. These will be easily and happily replaced by Iranian crude and Russian LNG respectively.

    As for US sanctions on Iran, they are bound to fail miserably and Iran will not lose a single barrel from its oil exports. Moreover, threats by the US to sanction any country that purchased Iranian crude after the November 4 deadline are becoming farcical by the minute. First, the United States doesn’t have extraterritorial jurisdiction over other countries of the world to expect full compliance by them of the US sanctions on Iran. Second, China is not Djibouti to be threatened by US sanctions. It is the world’s largest economy and a superpower in its own right. China is going ahead with buying Iranian crude thus ignoring US sanctions on Iran and daring the United States to impose sanctions on it.

    And while the spat between the US and Turkey has led to a loss of value of the Turkish lira against the US dollar, Turkish President Erdogan has no intention of backing down. He is matching President Trump’s tariffs blow by blow.

    A continued dispute between the two countries could weaken NATO, undermine US sanctions against Iran and push Turkey closer to the Russian-Chinese axis. Turkey could also move closer to Russian efforts in ending the war in Syria and a possible rapprochement with Syria. It could also block Cyprus development of its newly discovered gas reserves in the eastern Mediterranean.

    My assessment is that the US will soon decide to cut its losses and stop tariffs against China and sanctions against Turkey. The alternative is an economic and geopolitical loss for the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Neil Dusseault on August 21 2018 said:
    Well, if WTI going from $75.27 to a close today above $68/bbl (on front-month contracts) is the "longest losing streak in years" then this must be the strongest bull market in decades. A year ago WTI was about $20/bbl cheaper than it is now, and again, that's considering prices off that recent high of $75.27/bbl.

    This is the headline for oil on another business news site:
    "Oil continues rally off multi-month lows, but trade dispute caps gains".
    Wow...what a misnomer.

    First, that high of $75.27 occurred earlier this Summer--so now that's considered "multi-months" away? Second, there will be no "cap in gains" today, as today's rally has nothing to do with "trade disputes" with China.

    Anyone who has traded oil for even just a few months should know that today is the Last Trading Day for front-month contracts on WTI (September 2018 delivery). Therefore, it's of no surprise that WTI was up by more than $1/bbl before the NYMEX pits opened, and was up over 2% before the NYSE & NASDAQ opened.

    So, let's see: My guess is that hedging from producers and bullish hedge funds via algorithmic trading will push WTI as close to $70/bbl as possible.

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