Saxo Bank: Dollar - new safe-haven while oil jumps on supply threats
“Following a strong start to the year we have seen multiple headwinds begin to emerge during the past quarter,” Hansen said. “Above all we find a real threat to global growth and subsequent demand for many key raw materials from the rising probability of a trade war between the US and many of its key trading partners, most importantly China.”
“Trade wars tend to be a losing strategy as raised tariffs results in lower trading volumes and growth while increasing the cost to consumers around the world,” he added. “The current robustness of the US economy compared with the rest of the world has led to a divergence in monetary policy between the Federal Reserve and other major central banks. This has resulted in a stronger dollar, which is piling additional pressure on indebted EM economies having to fight harder and pay a higher price for funding as global dollar liquidity becomes tighter.”
“One of the exceptions has been crude oil, which despite recent efforts from Opec and Russia remains bid amid the rising threat to short-term and long-term supplies from a range of producers including Venezuela, Libya, Canada and not least, Iran,” Hansen said.
“During the past week both industrial and precious metals as well as agricultural commodities have continued lower as trade war concerns and negative price momentum continued to attract fresh short-selling,” he said.
“WTI crude oil, meanwhile, spiked higher to reach levels last seen in 2014,” Hansen said. “Brent and WTI both received a boost when Washington turned up the pressure on Iran after demanding that all allies should reduce their imports of Iranian oil to zero after November. In addition, WTI crude was supported by the biggest stockpile drop in almost two years, rampant refinery demand and news that a one-month outage at a Canadian oil-sands producer could further reduce stockpiles at Cushing over the coming weeks. “
“The weekly petroleum status report from the EIA provided a smorgasbord of bullish news for oil,” he said. “Crude oil stocks dropped by almost 10 million barrels on combination of record exports and record refinery demand. The accelerating stock draw at Cushing, Oklahoma, the delivery hub for WTI crude oil futures supported a strong rise in the prompt spread on tighter supply concerns while almost halving the discount to Brent crude oil.”
“At the center of attention over the coming months will be supply and potentially the lack of it,” he said. “Despite the fact that the world’s three largest producers – Russia, Saudi Arabia and the US – are all taking aim at producing 11 million barrels/day each, several producers are struggling and could see its production slide further.”
“US sanctions against Iran after November 1 are expected to sharply reduce that country’s exports as customers around the world seek alternative suppliers for fear of US retaliation,” Hansen said. “Venezuela continues to see its oil industry collapse while recent fighting in Libya has once again highlighted the risk to its 1 million barrels/day production, currently down by 300,000 barrels/day.”
“Higher fuel costs, trade wars and a slowdown in global growth may eventually halt the oil market rally as attention turns to lower demand growth,” he said. “When this shift will happen and how high oil can rally before it occurs is anyone’s guess. Not least considering the elevated level of political interference currently impacting the oil market.”
“A recent Reuters survey of 35 economists and analysts forecasts that Brent crude will average $74/b during the second half of 2018, somewhat lower than current spot price of $79/b,” Hansen said. “From a charting perspective Brent crude oil looks likely to breach $80/b again before finding resistance ahead of $82/b.”