Why Oil Prices Didn’t Go Much Higher This Week


“The global economy has become increasingly fragile and uncertain, with growth slowing and downside risks continuing to mount.”

That warning came from the OECD on Thursday, which said that the economic outlook for both industrialized nations and emerging markets were “weakening.” Unless governments took action, “growth could get stuck at persistently low levels.”

One of the main reasons that a low-growth trap looms is because of the U.S.-China trade war, which is taking “an increasing toll on confidence and investment, adding to policy uncertainty, aggravating risks in financial markets and endangering already weak growth prospects worldwide,” the OECD said in its latest Interim Economic Outlook.

The OECD cuts its global GDP growth rate to 2.9 percent for 2019, the weakest expansion since the global financial crisis a decade ago. Worse, “downside risks continue to mount.”

But it isn’t just the trade war between Washington and Beijing. The uncertainty surrounding a fast approaching no-deal Brexit could also undercut growth and investment. That would push the UK into a recession. The Chinese economy is also decelerating, and faces “significant financial market vulnerabilities” related to high debt and deteriorating credit quality.

In response, the OECD calls on central banks to remain accommodative, although it noted that low interest rates are not a cure-all. Instead, governments should lean on more aggressive fiscal policy, taking advantage of low interest rates to make public investments.

The U.S. Federal Reserve just announced another 25-basis point cut this week, and suggested that it would take more action of the economy deteriorated. “Weakness in global growth and trade policy have weighed on the economy,” Fed Chairman Jerome Powell admitted. “Although household spending has been rising at a strong pace, business fixed investment and exports have weakened,” the Federal Open Market Committee said. Economists fear that the slowdown in manufacturing and business investment could yet drag down consumer spending, which to date, has held up.

FedEx slashed its profit outlook this week, another worrying sign of weaker growth. “The global economy continues to soften and we are taking steps to cut capacity,” FedEx CEO Fred Smith said in an earnings call on Tuesday. The weakness is being “driven by increasing trade tensions and policy uncertainty.”

In fact, there are more than a few people angry about the trade war. The governor of the central bank of the Philippines said that Donald Trump was the greatest threat to the global economy.

Closer to home, U.S. farmers are struggling under the weight of a multi-year downturn in agricultural prices, a slump that deepened at the onset of the trade war last year. According to Bloomberg, net farm income in 2019 could end up being 29 percent below 2013 levels. Worse, debt has ballooned to $416 billion. Without the China buying up American corn and soybeans, bankruptcies are on the rise.

The war between ethanol and oil refiners has only made things worse. The Trump administration has disrupted the market for ethanol after issuing a series of waivers to refiners, allowing them to get out of their biofuel blending requirements. Trump hopes to make amends with farmers, but ethanol groups are worried because he was scheduled to meet with oil refiners and its allies in the Senate on Thursday, including Texas Senator Ted Cruz. Trump is reportedly growing tired of the issue.

However, on a positive note, the somewhat softer tone between Washington and Beijing suggests that both governments are eager for a deal. The Trump administration recently exempted some Chinese goods from tariffs, a goodwill gesture that comes in response to similar moves from China.

The odds of a significant breakthrough appear remote, but perhaps something more modest that allows both leaders to save face and back away from the edge. However, on Thursday, President Trump abandoned his restrained tone and appeared to threaten China again, seemingly an attempt to tighten the screws on Beijing ahead of trade talks.

“I think there’ll be a deal maybe soon, maybe before the election, or one day after the election,” Trump told reporters on Tuesday. “China thinks I’m going to win so easily and they’re concerned because I told them: ‘If it’s after the election, it’s going to be far worse than what it is right now.’”

It’s remarkable that Brent remains stuck in the mid- to low-$60s per barrel, despite the largest supply disruption in history after the Abqaiq attack. Worse, a military retaliation from Saudi Arabia and/or the U.S. is still a possibility.

Some analysts are flabbergasted with low oil prices. ‘The global market is currently operating with minimal spare capacity, heightened supply risk, and relying on inventory draws to meet demand,” Standard Chartered analysts wrote in a note. “Prices are currently just 6% higher than before the attacks, which in our view is not enough of an increase to fully price-in the reduction in spare capacity, let alone reflect either the increase in supply risk or the cumulative supply loss.”

However, the global economy is keeping all of those concerns in check. And if the deceleration continues, the upside to oil prices could be taken away altogether.

Crude Oil


Please enter your comment!
Please enter your name here