|25 September, 2019

Are oil bulls standing on shaky foundations?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

An appreciating greenback is another theme that could obstruct oil's upside gains.

Investors with an appetite for oil should fasten their seatbelts for a volatile ride as we enter the final quarter of 2019.

The commodity’s valuation is set to be influenced by supply-side factors after attacks on Saudi Arabia’s oil facilities fanned geopolitical tensions and increased the threat of negative supply shocks. Given how the disruption initially removed 5.7 million barrels per day of Saudi output, accounting for over 5% of the world’s supply, the dynamics impacting oil markets are switching from demand-side back to supply-side drivers. Although the kingdom has pledged that it will bring back all lost output by the end of September, this clashes with reports from the Wall Street Journal that repairs at damaged plants may take “many months”. Mixed messages about how fast Saudi’s oil production will recover is seen adding to the volatility and uncertainty around oil’s outlook.

Oil prices are still in the green year to date, with WTI Crude gaining 28% and Brent Crude rising 19%. While the prospects of supply disruptions amid geopolitical tensions could lend Oil bulls further support, demand-side concerns like rising US inventories, trade uncertainty and signs of slowing global growth will most likely cap upside gains. The Organisation of Economic Cooperation and Development has downgraded its global growth forecast for this year to 2.9% and 3% in 2020. Escalating trade tensions between the United States and China have sapped investor confidence and dampened risk sentiment across global financial markets. Given how China’s GDP is projected to expand by 6.1% in 2019 and 5.7% in 2020 compared to the 6.6% achieved in 2018, this presents a significant risk for oil as the nation is world’s second largest energy consumer.

An appreciating greenback is another theme that could obstruct oil’s upside gains. A divided Federal Reserve is forcing investors to re-evaluate how deep US interest rates will be cut in 2020. The Dollar is finding support from reduced rate cut expectations but safe-haven flows as uncertain global conditions and geopolitical risk factors stimulate risk aversion. King Dollar has appreciated against almost every single G10 currency excluding the Japanese Yen since the start of Q3 and gain further amid geopolitical tensions.

Oil markets may end up transforming into a battleground for bulls and bears as supply-side factors clash with demand-side drivers. Although geopolitical tensions could inject oil bulls with a burst of inspiration, the rally will most likely be built on shaky foundations due to the absence of demand. Where Oil concludes 2019 will be dictated by the US-China trade developments and health of the global economy.

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* Any opinions expressed in this article are the author’s own

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© Opinion 2019

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