Oil rally pauses as focus switches to growth and US stock report

WTI crude oil has turned slightly lower today to challenge the uptrend from last December, currently at $61.60/b followed by the 200-day moving average below which it has not settled since January 16.

With regard to the recent escalation of tensions in the Middle East it is our belief that the risk of it leading to an armed conflict and a subsequent spike in crude oil prices can be ruled out. With President Trump often measuring his success on low gasoline prices and high stock market valuation a war with Iran does not make any political sense with an election to be fought in 2020, no matter how much it is being sought by some, both inside and outside of Washington. 

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. 

We see a risk of slightly higher prices during the coming months as global demand reaches its seasonal peak. The OPEC+ group is likely to maintain a softly softly approach to rising production in order to avoid renewed price weakness. On that basis the only thing they can do at this stage is to signal willingness to maintain current production cuts until customers demand more crude to replace lost barrels from Iran. Baring a geopolitical event such as Libya or Iran, the upside in our opinion should be limited to $70/b with support focusing on the above-mentioned level.

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.