Oil optimism likely to ease as growth outlook worries
|Oil prices are surprisingly robust considering the latest headlines that emerged in August. Between trade spat titles, recession fears and weak economic data releases confirming a drop in China’s industrial production and a decline in Germany’s exports, confirmed by slowing 2Q GDP data, all elements were united to pressure oil back towards early August levels. Yet, oil traders appear rather optimistic that a quick fix between the world’s two largest economies would occur in the near future as US President Donald Trump is expected to plan a call and a potential face-to-face meeting with his counterpart Xi Jinping that would include both Hong Kong protests and trade matters, “soon”. Under current circumstances and despite the OPEC+ attempt to curb production, the prospect of oil prices along October 2018 high is still far from achievable.
Indeed, despite a potential short-term rebound in oil prices due to positive headlines on topics such as the US-China trade war or the release of an Iranian oil tanker in the Gulf of Gibraltar, it seems that the longer-term outlook is not boding well when looking at global demand. Negative output gap across economies and slowing inflation, as is the case of Mexico, whose central bank, Banxico, finally cut rate by 0.25% percentage points to 8% for the first time in 5 years, following the Fed’s footsteps in a similar fashion as New Zealand, Thailand or Philippines, should not turn in favor of oil. Therefore, the OPEC’s largest producer Saudi Arabia, willingness to reduce production further if necessary has probably become a minimum measure to stabilize prices at current levels. On a side note, WTI – Brent crude spreads are now lowest since 20 July 2018, reflecting continued congestion of crude oil pipeline transportation from Permian basin to refineries and plans to build up crude export terminals in the Gulf of Mexico in order to increase shipments to foreign markets. The latter would imply that WTI should become much more sensitive to global demand developments, although projects are not expected to start before 2020.
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WTI is currently trading at 55.61, approaching 56 short-term and set for a weekly gain following two weeks in negative territory.
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