Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Jeff Gundlach thinks that a Stocks Bear Market has started. Is he Right? - 18th Dec 18
Gold’s Not An Investment – You Won’t Get Rich - 17th Dec 18
Stock Market At Medium-Term Lows, Which Direction is Next? - 17th Dec 18
This Stock Will Drive America’s 5G Buildout - 17th Dec 18
Stock Market Turn In The Tide - Have a Happy Bear Market! - 17th Dec 18
How A NASA Scientist Could Trigger The Next Cannabis Boom - 17th Dec 18
iShares Russell 2000 IWM Leading Stock Market Decline - 17th Dec 18
Where is the Dow Stock Market Santa Rally? - 17th Dec 18
With Weaker Climate Consensus, Expect Elevated Climate Change - 16th Dec 18
SMIGGLE Advent Calendar 2018 UK Contents - What You Get Look Inside Review - 16th Dec 18
Is there a Lump of Coal in Santa's Stock Market Bag? - 16th Dec 18
This Market Will Drive Gold in 2019… - 16th Dec 18
Gerald Celente:Central Banks Can’t Stop a 2019 Debt Disaster - 16th Dec 18
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Why the End of the Longest Crude Oil Bull Market Since 2008?

Commodities / Crude Oil Nov 13, 2018 - 03:11 PM GMT

By: Dan_Steinbock

Commodities

In the past two years, crude oil has steadily advanced, supported by global recovery. But in just 10 days, oil has posted the longest losing streak since mid-1984 – thanks to overcapacity and the Trump trade wars.

Half a year ago, crude oil prices were expected to climb from $53 per barrel in 2017 to $65 per barrel by the year-end and to remain around that level through 2019. By mid-October, crude had soared to $75 and the rise was expected to continue.


Yet, in just 10 days oil has fallen to less than $60. Oil prices are in a bear market one month after four-year highs. The question is: Why?

Oil’s short-term fluctuations

The simple answer is that until mid-October the escalation of US-Sino trade tensions, despite President Trump’s vocal rhetoric, seemed to be manageable, which supported global prospects. Yet, the US mid-term elections have contributed to growing volatility and uncertainty.

Trump’s illicit decision to withdraw from the Iran nuclear deal (JCPOA) contributed to the upward oil trajectory, along with the expected supply disruptions in Venezuela which is amid domestic economic turmoil and US efforts at regime change.

As US-China tensions continue to linger and bilateral talks have not resulted in tangible results, expectations have diminished regarding the anticipated Trump-Xi meeting in late November. Consequently, global recovery no longer seems as solid as analysts presumed only recently. Even signs that OPEC and other oil producers including Russia could soon cut output have not put a floor under the market.

Also, Trump’s concession, after heavy pressure by Brussels, to allow Iran to remain connected to SWIFT, which intermediates the bulk of the world’s cross-border dollar-denominated transactions, has contributed to more subdued oil price trajectory.

Another supply-side force involves US crude inventories that have been swelling. These stockpiles rose by 5.7 million barrels toward the end of October, although gasoline and distillate supplies shrunk, according to American Petroleum Institute. US production is reportedly rising faster than previously projected.

But whether these near-term forces will prevail depends on longer-term structural conditions.

Global crisis and post-crisis fluctuations

At the eve of the global financial crisis in summer 2008, crude oil reached an all-time high of $145.31. As the bubbles burst, crude plunged to a low of $40; a level it first reached at the turn of the ‘80s, amid Iran’s Islamic Revolution.

During the global crisis in 2008-9, the US Fed and other central banks in the major advanced economies cut the interest rates to zero, while resorting to rounds of quantitative easing. Meanwhile, policymakers in advanced economies deployed fiscal stimulus packages to re-energize their economies. So, crude rose again until the mid-2010s, when the price still hovered above $100 per barrel.

That trajectory came to an abrupt end, when the Fed initiated the rate hikes and normalization policies, which strengthen the US dollar, whereas oil prices, which remain denominated in dollars, took a dramatic plunge. By early 2016, crude prices fell to less than $30 – below the crisis low only eight years before.

Crude prices were also hit by the “oil glut”, or surplus crude oil around 2014-15, thanks to critical volumes by the US and Canadian shale oil production, geopolitical rivalries among oil-producing nations, the eclipse of the “commodity super-cycle,” and perceived policy efforts away from fossil fuels. As meetings by the Organization of the Petroleum Exporting Countries (OPEC) failed to lower the ceiling of oil production, the result was a steep oil price meltdown.

Eventually, the 13-member oil cartel was able to agree on a ceiling. At the eve of the OPEC talks in Vienna in spring 2017, oil prices rose to $55. Riyadh needed stability to cope with domestic economic challenges and the war against Yemen. So it permitted Iran to freeze output at pre-sanctions levels. Russia supported the cuts because it remains dependent on oil revenues. The extension also benefited shale and gas producers in the US and the Americas.

Crude prices began to climb, but thanks to the OPEC agreement to cut production.

Oil’s longer-term structural prospects

Crude markets are under secular transformation. Bargaining power has shifted from advanced economies to emerging nations. US is producing record levels of shale. Renewables are capturing more space. Due to sluggish demand, further cuts loom in horizon as prices remain subdued.

Moreover, when dollar goes up, oil tends to come down. Oil is denominated in US dollars, whose strength is intertwined with the Fed’s policy rate. As long as the Fed will continue to hike rates, this will contribute to further turbulence, particularly in emerging economies amid energy-intensive economic development (Figure).

Figure    How US Dollar Undermined Crude Gains, 2008-2018



In November 2017, OPEC agreed to extend oil supply cuts until the end of 2018. That fueled crude from low-$50s in spring 2017 to more than $70 last mid-October. In effect, crude mirrored the elusive global recovery, along with the prime indicators of global economic integration.

It was these positive horizons of world trade, investment and finance that contributed to steady gains of crude prices until mid-October – but then the fragile recovery crumbled.

When President Trump showed no inclination toward US-Sino reconciliation, hopes associated with world trade, investment and finance finally dissipated. And as the prospects of global recovery turned elusive, crude prices began a steady fall.

In the short-term, the status quo could change, but that would require effective reconciliation in US-Sino friction and the reversal of US sanctions and energy policies, among other things. In the long-term, significant changes would require sustained OPEC production ceilings, economic malaise in leading emerging economies, dramatic reversal in world trade, investment and finance and – most importantly – the end of the dollar-denominated oil regime and thus the eclipse of US-Saudi military-energy alignment. 

Some of these changes are not economically viable. Some are desperately needed internationally. Still others are not likely to materialize without significant conflicts and geopolitical realignments.

Ironically, there was nothing inevitable about the dramatic reversal of oil prices in October. It was not based on economics. Rather, it was the effect of overcapacity and the Trump trade wars fueled by hollow dreams of an ‘America First’ 21st century.

That’s America’s policy mistake, but global economy will pay the bill.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2018 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules