OPEC to the rescue?
US Oil has been sold heavily recently on the growing concerns about global growth with President Trump now announcing tariffs against both the US and Mexico. The danger of fighting a war on two fronts is obvious and the impact could be considerable if all the threatened tariffs fall into place. Yen bids hit a two year high on Friday on a trade-weighted basis and 10yr US treasury yields fell to a 20 month low, as the market is showing concern about this and moving towards safe havens.
However, this deterioration in the Oil market could spur OPEC into action and extend their cuts. OPEC Secretary- General Mohammed Barkindo said that OPEC will take the current 'economic bearishness ' into account when they meet in the coming weeks. Mr Barkindo said that the OPEC are committed to keeping oil markets balanced beyond this year and beyond. Now, OPEC cuts have indeed been working and the Saudi Budget needs Brent as high as $80.
The supply disruptions in Iran, Russia and Venezuela are being offset by shale oil from the US. Russia have not been so keen on OPEC cuts as of late, seeing themselves as 'conceding the oil market' to US producers and that never goes down well in Moscow ;-), but as oil falls it may prompt Russia to act in unison with Saudi.
So a few rough future scenarios for oil at the moment:
- US-China, (and now Mexico) trade deals reached - demand for oil seen to increase on return to global growth
- Trade wars escalates - oil falls on weakening demand and global growth worries
- Status quo is maintained - OPEC meet and introduce cuts led by Saudi. Oil finds support
- A combination of points 2 and 3 - Oil socialites, rangebound, between the two narratives
