EM weakness posing risk to oil demand
Head of Commodity Strategy
The global rout in emerging market currencies continues apace with the USDTRY again attacking its all-time highs first reached overnight in a low-liquidity Asian session.
The Turkish lira is not the only EM currency showing notable weakness today, however, with the ZAR already having flash-crashed to over 15.50 versus USD overnight and the Chinese yuan sitting just shy of the crucial 7.00 USDCNY level as well.
These developments have seen the MSCI EM currency index fall to a one-year low and a continued decline will begin to pose a major challenge to global oil demand. A barrel of crude priced in TRY has now almost doubled since the beginning of the year while other countries increasingly also feel the heat despite the recent decline in the spot price of crude oil from its 3-1/2-year high.
For now the price of Brent crude oil continues to hover above key support with the expected slump in supply from Iran once US sanctions kick in being offset by the aforementioned risk to demand from trade wars, dollar strength, and EM weakness.
Funds were sellers of crude oil again last week with the 27,000-lot reduction in the combined Brent and WTI taking the net-long down to 732,000 lots, the lowest since October. Traders, however, remain unprepared for a continued drop with the combined gross-short in Brent and WTI at just 71,000 lots being close to the lowest seen during the past five years.
Brent crude oil has settled into a relative tight range between $71 and $75/barrel. Continued focus on Turkey and EM contagion raises the short term risk of further weakness, something the market is currently unprepared for.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.