Head of Commodity Strategy, Saxo Bank Group
Summary: Neither renewed Middle East tensions nor possibly deeper OPEC+ output cuts has managed to bump crude oil from its tight range. The reasons? Growing worries about the impact of the trade war on global economic growth as well as a stubbornly strong dollar, says Saxo's Ole Hansen.
Adding to this is the dollar, which, according to the US Fed’s trade weighted broad dollar basket has reached its highest level since 2002. This development, together with growth concerns, may once again lift macroeconomic concerns about the impact on several emerging market economies that account for most of the growth in oil demand.
Using Brent crude oil as a proxy for the global market situation we are currently seeing an interesting market development. While the crude oil spreads are sending a signal about tightening, markets speculators are hesitant about increasing exposure further. The spread between the prompt and the sixth month Brent futures contract has reached a five-year high while hedge funds stopped buying a couple of weeks back.
However, with the global economy showing further signs of cooling as the impact of the US–China trade war begins to be felt outside of Asia, the risk is that slowing demand growth eventually will overtake the risk of lower supply. The Paris-based OECD has downgraded further its projection for global growth this year while Rosengren, the Bosten Fed President, warned that the trade war is increasing downside risks to the US economy. Note the consensus forecast for US Q2 GDP growth has been downgraded to 1.98% compared with 2.65% a month ago.
The biggest threat that could trigger an oil price spike is not from the Middle East but the Mediterranean where an escalation of the current unrest in Libya carries the risk of hurting production which have grown rapidly in recent years.
Later today at 14:30 GMT (CET+2) the US Energy Information Administration will release its Weekly Petroleum Status Report. With US total stocks of crude oil and products currently running above its long-term average, the market had been looking for a price supportive draw in both. However that was not being entertained by the American Petroleum Institute which last night reported an increase in both crude and gasoline stocks.
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