Head of Commodity Strategy
Summary: Although the US president is gunning for lower crude oil prices this is a battle he's unlikely to win given Saudi and Russian ambitions for higher prices. Still, if it's any solace to Trump, flagging global growth will keep a lid on things.
Nevertheless, US production growth is phenomenal. To go from 9 million b/d to 13 million b/d in three to four years! This helps limit the upside potential for crude oil prices on global markets. However, we should keep in mind that the last rally in crude oil prices mainly resulted from Opec policy. Production in Opec countries was growing until last November when they realised that prices were slumping. Since then, Opec members cut production by approximately 2 million b/d.
We should also take another factor into account. Not much of the data on the market is actually up to date. Many of them are published on a quarterly or monthly basis, and with a lag at that. The only major market with weekly data is the US. As Saudi Arabia is fully aware of the related possibilities, in order to support the bounce, it reduced its crude oil exports to the US. So the market can see that they are limiting supplies and that they react. This is combined with the situation in Venezuela.
Therefore, we can safely say that many factors led to an increase in prices. However, although Opec and Russia can control a large part of supply, they cannot control demand. And this demand will be affected by the economic slowdown. Crude oil prices cannot rise when growth is slower – it would only intensify the slowdown.
It should also be noted that when crude oil prices reached $85/b last year the dollar was strong, interest rates were hiked and debt was rising. This affected many emerging markets. Take India for example. The crude oil price in Indian rupees surged as much as 80%. Then it slumped and the slump supported the Indian economy and many other EM economies. We cannot have rising crude oil prices combined with stronger dollar and fading global growth.
*Ole Hansen's comments above were originally published in a wide-ranging interview in the Polish business and financial newspaper, Parkiet.
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