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The Inevitable Outcome Of The Oil Price War

Russia, with Saudi Arabia either…

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The Real Reason Oil Prices Crashed

Whose fault is the current…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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What’s Stopping Oil From Breaking Out?

Oil prices have settled into a temporary rut, with WTI stuck in the mid-$50s and Brent in the mid- to low-$60s. Threats of supply disruptions in the Middle East have failed to buoy prices, while ongoing production and export declines in Iran and Venezuela are also failing to push up crude.

“I think geopolitics is a key driver but I think what’s in the driver’s seat right now is the concerns around global demand,” Virendra Chauhan, an oil analyst at Energy Aspects, said on CNBC. “OPEC’s supplies are down by 2 million barrels per day. That’s the steepest level in a decade. And yet, oil has gone nowhere in the past month.”

U.S. supply growth has grown significantly over the past two years, offsetting much of the cuts from OPEC. This has become a perennial problem for OPEC+. However, the sudden slowdown in demand is adding to their predicament.

As a result, at this juncture traders are much more focused on demand concerns and a souring economy. “Demand has undoubtedly slowed down and a lot of that has to do with the China-U.S. trade war,” Chauhan said. He added that the top concern for investors right now is how the trade war might start to disrupt global supply chains.

“The tensions in the Strait of Hormuz have left oil prices cold so far,” Commerzbank said in a note. “This is chiefly due to concerns about demand that even Friday’s solid US GDP figures were unable to dispel.”

However, at the same time, Chauhan of Energy Aspects added that demand could be bottoming out right about now, and could recover a bit going forward, especially with central banks rushing to loosen monetary policy.

The U.S. Federal Reserve is widely expected to cut interest rates this week, the first cut in a decade. On the one hand, a rate cut could reassure markets, boost equities and keep the economic expansion running. But the expansion could also be running on fumes. Critics of a rate cut argue that the fact that the central bank is cutting rates only months after hiking them is extraordinary, and ultimately signals deep concerns about economic weakness.

Worse, should a recession or financial crisis hit, the Fed will have used up its firepower. Related: An Unusual Development In Natural Gas Markets

With that said, the short-term impact will be seen as positive for both equities and commodities, including crude oil. The pricing effect may be limited, however, since a monetary stimulus is largely baked in to forecasts at this point.

Switching back to the real economy, the latest data has been somewhat mixed. Bloomberg data showed a further slowdown in China in July.

The U.S. reported slower GDP growth in the second quarter at only 2.1 percent, which is still decent but down significantly from 3.1 percent in the first quarter. Worse, 2018 GDP was revised down from 3 to just 2.5 percent, which raises questions about how strong the American economy has really been in the recent past. At the same time, inflation was higher than expected.

Chinese and American officials will resume trade negotiations this week, but the outlook for a grand bargain looks increasingly unlikely. “China’s second-half economic outlook continues to be clouded by great uncertainty over trade relations with the U.S., which in turn constrains its policy responses,” Liu Li-gang, chief China economist at Citigroup Inc. in Hong Kong, wrote in a note. Related: Chinese LNG Imports See Strong Growth This Summer

One bright spot has been consumer spending, which has been strong. But the manufacturing sector is largely in a state of recession. Another big question revolves around how durable consumer spending will prove to be going forward. The latest figures “showed very robust private consumption in the second quarter,” Commerzbank said in a note. However, “market participants appear not to expect this strength to be maintained in the coming quarters.”

The investment bank says that these concerns about the health of the economy explain the recent positioning by oil speculators, who “noticeably reduced their net long positions in Brent and WTI in the latest reporting week.”

If the economy fails to slow even further, this could be the bottom, Commerzbank said. “We see the current price weakness as exaggerated and envisage only limited further downside potential. After all, the oil market is if anything under- rather than oversupplied at present.”

Perhaps the market is under-supplied. But the concerns, confusion, and mixed signals about the global economy may head off any price gains in the short run.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on July 30 2019 said:
    It is the glut which has been going on since the oil price crash of 2014 and which has been augmented during the last two years by the futile trade war the US is waging on China.

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

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